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Collapse of Apple & Rise of the Blackberries – Stock Market Cycle
Physical Copper ETFs? Not So Fast
Top 10 Reasons Why You Shouldn’t Invest In Mining Stocks
World Gold Council's Grubb: Gold To Continue Higher In 2013 Amid China Recovery, Record Central Bank Buying
Bill Whittle - Our Side Needs to Believe in Our Side
Mickey Fulp Expects Rally in Juniors to Begin in January
Giving Thanks for Gold
A Macro View of T Bonds, Gold & Money Supply
Euro Rallies Despite European News
Gold Back Above Its 50-Day Moving Average
Brazil Gold Reserves In Fixed Term Gold Deposits With Bullion Banks
Monthly Charts Clarify Prognosis for Gold & Silver
Silver Update: Public Trough 11.22.12
SilverFuturist: Bid vs Ask Price on Kitco
Godfrey Bloom: MEP on Germany's “golden opportunity”
Bond bubble attracting more media attention
Rick Rule: Be a Risk Manager, Not a Reward Chaser
China May Launch a Gold Currency
Practical Hawala Privacy Tips
Turkish Prime Minister Says that Gold should Replace the Dollar
Why the Worst is Not Over For China’s Economy
Borrowing More Debt
A Quick Note On Silver Heading Into The Holiday Weekend
Bundesbank wont explain sale of gold even if its only to Finance Ministry for coins
Andrew Maguire: Price suppression mechanics of GLD and SLV
Mike Maloney: Hunt brothers sacrificed to save the US dollar

Collapse of Apple & Rise of the Blackberries – Stock Market Cycle

Posted: 23 Nov 2012 11:29 AM PST

I know most Apple enthusiasts will be rolling their eyes with my analysis and that's fine because the rest of us need people to buy our shares as we unload long positions or sell Apple short .

All joking aside, the charts below clearly show some very interesting information you cannot afford to overlook. At minimum, take a quick glance at the charts which tell the full story on their own…

The Four Stages of AAPL & RIMM

Markets are cyclical in nature. There is a constant process of expansion and contraction, rally and decline that continues as the market determines the theoretical fair value of a security. The sum of these moves forms an unquestionable cyclical pattern consistent within all time frames.

During a cycle a stock enters different phases of support, from irrational exuberance typically found before its peak, to periods of widespread discontent where its price is continually punished. However there are never distinctly good or bad stocks.

Every "good" stock will eventually become a bad one and vice versa. There are however good trades; trades that reward an investor who has correctly anticipated a move and positioned himself accordingly.

Classic economic theory dissects the economic cycle into four distinct stages: expansion, trough, decline and recovery. A stock is no different, and proceeds through the following cycle:

Stage 1 – After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.
Stage 2 – Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock's price.
Stage 3 – After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock's price.
Stage 4 – When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters into a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock's price. More times than not all of stage 2 gains are given back in a short period of time.

While these stages are historically defined over long time periods they actually exists in all time frames, allowing traders to take advantage of a cycle regardless of their trading time frame. Fortunately this phenomenon, known as a "fractal", exists within all security markets. A fractal is simply a rough geometric shape that can be subdivided into smaller parts that have the same properties; a smaller version of the whole.

This is important to understand because through technical analysis as we are often analyzing multiple time frames. In the short term, the four stage model may repeat itself many times. The combination of these short term cycles form a medium term cycle, and the combination of multiple medium term cycles form a long term cycle. Recognition of these cycles is paramount in trading success.

The Four Stages Profile: This signature profile happens over and over again in the market and all the great leaders eventually become laggards.

REAL LIFE PROFILES:

Variety in Trading

Investment securities (stocks, ETF's, options, futures) can be described as being similar to different types of athletes, each with their own unique style and personality. Some can be characterized as sprinters, participating in quick bouts of movement but tiring quickly. Others could said to be more similar to a marathoner, enduring prolonged courses in one direction without pause or interruption.

When I look to make a trade I look for sprinters as historically I have had the most success with them. Other investors like pension and mutual funds are more interested in the long term marathoner that provides steady performance. There is no one way to trade; each method can be equally profitable or unprofitable. It ultimately comes down to what style works best for you, and the only way that can be determined is through trial and error.

Different phases, different strategies

As noted above, the market alternates between periods of trending activity and periods of consolidation. In a trend (stages 2 and 4) there will be an expansion of the price range in one direction. An uptrend will have a series of higher highs and higher lows (stage 2), while a down trend will produce lower highs and lower lows (stage 4). In a consolidation there will be a contraction of price range prior to a reversal in trend. This neutral stage is avoided by trend traders.

A stock in stage 1 or 3 is typically correcting itself after having experience a prolonged move in one direction. These corrections are found after periods of extreme movements that often conclude with emotional and undisciplined trading at peaks and troughs. Trading these two stages is quite different than 2 and 4, and this book will teach you how to manage your risk and trade these stages responsibly.

A short term consolidation within a primary trend is one area where we want to study the price action of a security for clues as to whether there will be a resumption in the trend, continued consolidation, or reversal. Sometimes however it is difficult to identify any order or consistency on any given time frame.

If you are a trend trader these periods should be avoided. Trading has enough inherent challenges already and at all times a successful trader will only be searching out those trades that have a high probability of being profitable.

Trading is all about finding an edge or an advantage and exploiting it for maximum profit. If there is no such edge than there is no reason to be involved. I will say this now and again many other times: Sometimes the best trade is no trade!

Naturally, regardless of the stage a stock is in or your conviction of its direction, risk of financial loss is always inherent in trading and this is critical to always keep in mind. The most successful traders are not immune to this and they too will have unprofitable trades. The key is to minimize those loses by only trading those stocks that have the highest probability of being profitable. This is what separates the profitable and professional traders from those that lose money.

Emotions and Lifecycle Analysis

History has an uncanny ability to repeat itself. Whether it's the rise and fall of an empire or the rise and fall of a stock, there are clear cycles that are prevalent throughout history.

People may change, but human nature, and our ability to act, react and overreact is simply an innate part of our being. This predictability is what forms the basis of technical analysis and provides a trader with an edge with which to trade upon. When we are analyzing cycles we really are analyzing emotions, trying to gain insight as to how market participants are behaving.

Upon conducting such analysis it can at times seem that markets are be behaving "irrationally" and out of order. Undisciplined traders often fall victim to their emotions and lose control of their objectivity. As people behave irrationally, so too does the market, and unfortunately these conditions can persist for long period of times.

John Maynard Keynes is often quoted for suggesting that "The markets can remain irrational longer than you can stay solvent." This is a harsh reality and puts great emphasis on the importance of discipline, risk management, and a keen eye for price action.

Emotions are what separate the successful traders from those that lose money. They can be regarded as a relentless opponent, often showing up without warnings and striking you at inopportune times. The successful trader is able to recognize their presence and maintain objectivity, constantly assessing their own strengths and weaknesses.

There will ultimately be times where you can't control your emotions; however you can always control how you respond to them. Any time you recognize that your emotions are influencing your outlook you are already one step ahead of the average market participant. It is at this point that you step back, refocus your perceptions, examine the price action, and then take the appropriate action.

An understanding of herd or mob mentality is important in trading and can provide you with an edge over the average participant who doesn't contemplate what is happening around them. In a mob or riot, we never know what the feelings and motivations are of all the individual participants.

There are however certain emotions that seem to appear at distinct times and a certain predictability in their development. A stock's price action is no different. While we never know the underlying feeling and motivations of all participants, there are distinct emotions that are shared by the herd at various stages of a stock's life. An understanding of these emotions and their implications on the price action of a stock is an advantage that the profitable trader maintains.

The Stock Market Lifecycle could be explained in much more detail, but this report gives you the foundation of stock / index trading cycles. I will be covering this topic in a future video with much more detail.

The Apple Money Tree Is Losing Its Leaves…

The Fruit War – Apples Top While Berries Bottom

It is very interesting that AAPL shares topped the same week rim shares bottomed. Could the BB10 be the turnaround for Research in Motion? Either way the market is somewhat predictable as traders and investors buy the rumor that BB10 will be good, and they sell the news once it arrives no matter the outcome good or bad. Jan 30^th is when it's unveiled so we could see RIM shares continue to claw its way out of the grave.

RIM – Daily Chart Look of Price Pattern

Conclusion:

Knowing this information is crucial to survival as this cycle happens on all time frames (1 minute chart all the way up to yearly charts). Harnessing this information for trade selection and timing greatly reduces the amount of trades you take, while focusing only on new leaders which have massive upside potential. You can see some of my trade ideas which are in Stage 1 Accumulation mode getting ready for takeoff here: http://stockcharts.com/public/1992897

Judging from the recent price action in the broad market (SP500, NASDAQ, DOW, IWM) along with AAPL shares which have a large impact on index price direction. I feel the market is setting up for a strong Santa Clause rally in the coming week.

2013 looks like it will be a VERY exciting year for trading and investing as several sectors, stocks, and foreign country indexes are in Stage 1 Basing patterns about to start a new bull market. These major plays will become part of my trading alert service at www.TheGoldAndOilGuy.com from this point forward.

Chris Vermeulen
Co-Author: Brennan Basnicki

Physical Copper ETFs? Not So Fast

Posted: 23 Nov 2012 11:22 AM PST

By CommodityHQ:

By Jared Cummans

For more than two years now, issuers like JPMorgan and iShares have been battling to bring physically-backed copper ETFs to the markets. At first glance, it seems like a solid idea. After all, (GLD) and (SLV) are two of the most popular ETFs in the world, and each of them offers physical exposure to their respective metals. Yet the proposed copper products remain in the doldrums, as the red tape and roadblocks seem to be endless for these proposed products.

A recent SEC study stated that there was little connection between the flows of commodity-based securities and the prices of the commodities themselves. But a copper users group including AmRod Corp, Southwire Co and Encore Wire Corp, have come out against the study. This group

Complete Story »

Top 10 Reasons Why You Shouldn’t Invest In Mining Stocks

Posted: 23 Nov 2012 11:14 AM PST

In consideration of the once profitable mining sector…here are the top ten reasons why you should avoid mining stocks at all costs…

1. They Go Down – Owning an investment or asset that goes down in value is not the type of situation we want to find ourselves in, or become accustomed too. For example, if you wake up one morning (or any morning for that matter), you will see that your mining stocks are down 25%…leaving you with only 75% of your asset. That 25% literally, got up and walked away. However, if you wake up in the morning with a gold coin in your hand, it will be the same size and weight as the night before—not 25% "lighter" as in the case of mining shares.

2. Nationalization of Mines - Every government in the world today is minutes away from seizing all natural resource assets(whether they know it or not), including the US, Australia, and especially Canada. There are lots of industries that represent safer risks, ones that governments will not negatively interfere with—such as insurance, banking, and the auto sector.

3. It's Just Paper – Despite the fact that many individuals and funds claim to be making millions (and sometimes billions) investing in and building public mining companies, it's all just a paper game. At some point, the entire paper money and global finance system will freeze up, reset, and all paper assets will become worthless. Remember–if it's not small enough to fit in your hand and hold, you don't own it (that includes your house).

4. Manipulation – It's common knowledge that the US Federal Reserve and Global Central Banks, are actively shorting and suppressing gold and silver mining stocks. It works very simply–your stock broker sends a monthly financial report to the US Fed which details your mining stock holdings, and then they go to work. They short what you own, just long enough to induce you to sell. Once you've sold the position, it gets updated in the broker's system, and the Fed covers its short positions—and in doing so, drives back up the price of the stock. Unbelievable.

5. They Don't Go Up With Gold – Anyone who's invested in mining shares in the last few years knows that they no longer track the price of the metals. If you want proof of this, simply look at a chart of the GDX compared to gold going back to 2008. Up until that time, the miners outperformed the metals—but those times are history, and due to the reasons on this list, they will not return. Many people say they're undervalued, and will snap up in price…yatta, yatta. This time it's different.

6. They're At Historical Lows and Going Lower – Compared against the metals, mining shares are at their lowest levels in nearly 30 years. A 100 year old man was mumbling recently about this, but again, when we look at the performance of the shares since 2008 (included with the other items mentioned on this list), it's quite clear the shares are going to go much, much lower. When an asset is at or near an all-time historical low, that usually means it's going to go lower. Much lower.

7. The Charts Look Horrible – When looking at the following chart and applying directional technical analysis, we can see that the overlying trend is pointing down. As all great investors say, "The trend is your friend"—we must respect the trend, and understand (as proven by the arrow) that it's pointing down.

8. They Have Not Confirmed Themselves - One of the best strategies to keep in mind before we even consider investing in the mining sector (haha, fat chance, I know), is to wait for the shares to move higher and break to new highs to confirm that they're going to go higher in the future. If they can prove they're going higher, by first going higher…then we know that they're actually going to go higher. At that point we can go all in–and possibly with a little leverage to sweeten up the deal. After all, the new trend will have proven itself to be in place at that point.

9. George Soros Is Getting Involved - By our higher moral and ethical code, we cannot be involved with any investment that George gets his grubby capitalist hands on. This includes mining shares. He has recently invested hundreds of millions in the GLD and the GDX (a portion of which is in call options), and we simply cannot be aboard any ship he sets his foot on, even if that ship is a luxury yacht. Cork the wine, throw the champagne overboard, the party's over. George is here. We can either sell him our shares, or even short some, while giving him and the Soros Fund Management team the other side of the positions. Besides, clever old George is only holding paper, and as we all know, it'll be worthless as soon as the yacht makes it out of port.

10. Societal Collapse – When society ultimately collapses(due to war, peak oil, hyperinflation, famine, disease, Katy Perry, etc.–there's too many things [and people] to mention here), the only value mining shares will offer, is in the utility of being taped together into a roll and hung in the bathroom. At that point, items of value will include canned goods, hunting weapons (the outdoors will be a great source of food), a dry place to sleep…and of course, beef jerky.

Reflection

If we allow logic to be our guide in the marketplace at this point in time, it would behoove ourselves to divest of mining shares, and accumulate canned food, bows, arrows, pocket knives, and a high quality beef jerky (Slim-jims will suffice if nothing else). A forest cabin with double-locked doors would also offer utility.

As John Wayne once said, "Life's hard. It's even harder when you're stupid"–so let us not fall prey to the mining share promoters and pranksters, who assure us this is a once in a lifetime opportunity to invest in the precious metals mining sector.

All the best,
Tekoa Da Silva

World Gold Council's Grubb: Gold To Continue Higher In 2013 Amid China Recovery, Record Central Bank Buying

Posted: 23 Nov 2012 10:49 AM PST

By Hard Assets Investor:

By Sumit Roy

WGC's managing director of investment discusses the outlook for gold.

Marcus Grubb is the managing director of investment for the World Gold Council, where he leads both investment research and product innovation, as well as marketing efforts surrounding gold's role as an asset class. Grubb has more than 20 years' experience in global banking, including expertise in stocks, swaps and derivatives.

After the release of the World Gold Council's quarterly Gold Demand Trends survey, HardAssetsInvestor's Sumit Roy spoke with Grubb to get more details on the particulars of some of the report's more surprising conclusions.

Hard Assets Investor: Central bank gold demand looked strong again last quarter and seems on pace to exceed last year's five-decade high. Which central banks are buying? And what influences their purchase decision?

Marcus Grubb: Yes, absolutely. On the face of it, central bank net purchases of gold fell 31 percent when

Complete Story »

Bill Whittle - Our Side Needs to Believe in Our Side

Posted: 23 Nov 2012 10:28 AM PST

Bill Whittle's address to the David Horowitz Restoration Weekend 2012 at the Breakers, Palm Beach, Florida. November 15th - 18th.

Worthy of sharing widely and often.

Source: http://blip.tv/davidhorowitztv/bill-whittle-6444929

Mickey Fulp Expects Rally in Juniors to Begin in January

Posted: 23 Nov 2012 10:21 AM PST

Mickey Fulp joined us to discuss the junior sector at large, commodity prices, Gold, gold explorers, Uranium and he gave us several companies that he owns shares in.

The Mercenary Geologist Michael S. "Mickey" Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 35 years experience as an exploration geologist and analyst searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas, and water in North and South America, Europe, and Asia.

Mickey worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for over 20 years, specializing in geological mapping, property evaluation, and business development. In addition to his professional credentials and experience, Mickey is high-altitude proficient and is bilingual in English and Spanish. From 2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British Columbia.

Mickey is well-known and highly respected throughout the mining and exploration community for his ongoing work as an analyst, writer, and speaker.

Giving Thanks for Gold

Posted: 23 Nov 2012 10:19 AM PST

Reasons to be cheerful despite the crisis ahead – starting with big savings on gold bullion...

A Macro View of T Bonds, Gold & Money Supply

Posted: 23 Nov 2012 10:10 AM PST

While charting a potential bullish scenario for commodities in NFTRH 213, I became distracted by thoughts of the deflationary mindset that has been cooked up since 'Bond King' Bill Gross tugged on Superman's cape in the spring of 2011 by announcing his short positions against long-term US Treasury bonds, which was in essence a bet that the monthly EMA 100 boundary (red line, chart below) that had been in force for decades would be broken this time.

Sorry Bill, the inflation cycle into that time frame blew out right on your signal.

For reference, here is our favorite big picture chart once again; the 'Continuum' AKA the monthly view of the 30 year T bond yield.

As the 100 month exponential moving average was approached once again in spring of 2011, the inflationary noise became hysterical. Commodities topped out, the Euro crisis kicked off and European and US policy makers came into play in intense fashion.

Unfortunately for inflation boosters, policy came with an ingenious sanitization aspect to it, with the US Fed discriminating between T bond durations in its buys and sells. Europe's ECB even tried some sanitizing of its own. There is no inflation! Ha ha ha… For reference, the chart above shows the spread between 30 and 2 year T bond yields (shaded areas) AKA the Yield Curve that has been held in check, thereby holding gold in check as well.

Since we're using favorite macro charts in this post, let's pop up another one.

Gold follows the yield curve and the yield curve has been managed by Operation Twist. End of story.

But what is important now? Anyone? Beuller? Yes… what is important now is where we are going, not where we have been. Thus, on the subject of inflation and inflationary signals, here is the 'interlude' that popped up in the middle NFTRH 213…

Macro Geek Interlude (NFTRH 213 excerpt)

The market is getting dangerous ("getting dangerous" Gary? We thought it got dangerous in 2001, or 2007 at least) because the Fed is heavily in play now. Asset markets and the economy are sending signals that the inflation to date is not taking hold. Not in jobs, not in the US stock market (which has stopped going up), not in commodities and not in… precious metals.

So we are back again to Operation Twist and the yield curve. If not for this inflation signal dampening manipulation NFTRH would be going full frontal deflationist now because the inflationary signals are just not there and have not been there since the yield curve operation began. That is not because assets are not going up, but because money supply is not going up. That's a deflationary backdrop folks. Except that money supply is not going up (at least in large part) because the Fed – as it has repeatedly and officially announced – is sanitizing its long-term T bond purchases with sales of equal amounts of short-term bonds. Otherwise, money supply would be going up.

Now we consider that Twist is scheduled to end next month, whether by official decision or a due to a lack of supply of short-term bonds to sell. My guess is it is both. Some think that officials conveniently wanted gold to be held in check through the election. I do not disagree with them.

So if the Fed is going to let Twist terminate, and if they are going to continue to purchase T bonds, and if they are going to maintain ZIRP until 2015, and if they are going to continue MBS purchases, the adjusted money supply is likely to rise.

We will only know if a real deflation is fomenting if they stop meddling with the yield curve, flat out inflate and still the money supply does not rise. Then everybody out of the toxic pool – and I mean out of everything other than physical gold as suits individual needs – and sit happily in cash as we await Prechter's amazing buying opportunity, which would come at pennies on today's dollar.

Until then, deflation has not proven a thing because the appearance of deflationary signals has thus far come with the aid of yield curve and money supply suppression.

Post Script:

Why do some people think the Fed has to try to inflate (to infinity)? Well for one, this chart of the cyclical metal with the Ph.D. in economics vs. the barbarous relic (Cu-Au) shows that if gold has done poorly since Bill Gross inadvertently announced that T Bond yields were about to decline, then copper has done worse. Indeed, the previously inflation-boosted economy has been in trouble since 2006. This is a terrible picture for the economy.

So is the Fed likely to continue trying to dampen inflation expectations or… promote them going forward? Do they have a choice?

http://www.biiwii.com, Twitter, Free eLetter, NFTRH

Euro Rallies Despite European News

Posted: 23 Nov 2012 10:10 AM PST

By FXstreet:

The euro extended gains versus the dollar on Friday, underpinned by the positive tone among financial markets, with investor focus on the Black Friday where US consumers were expected to take part in the biggest shopping day of the year.

European markets extended their weekly gains and US indexes opened positively a shortened session, as fiscal cliff concerns seem an old memory now and investors are immune to eurozone problems.

EU leaders are struggling to reach agreement
Complete Story »

Gold Back Above Its 50-Day Moving Average

Posted: 23 Nov 2012 09:51 AM PST

Hickey and Walters (Bespoke) submit:
Complete Story »

Brazil Gold Reserves In Fixed Term Gold Deposits With Bullion Banks

Posted: 23 Nov 2012 07:15 AM PST

gold.ie

Monthly Charts Clarify Prognosis for Gold & Silver

Posted: 23 Nov 2012 07:04 AM PST

Silver Update: Public Trough 11.22.12

Posted: 23 Nov 2012 06:33 AM PST

This video is for purposes of criticism, comment, news reporting, teaching, scholarship, and research. All video and audio content is my own creation and is protected by Creative Commons Attribution-NoDerivs 3.0 Unported License. All other images and articles shown in this video are for purposes of "fair use" under Section 107 of the Copyright Act 1976. Netdania screenshots provided per Netdania permission based upon verbal attribution per Izabela Mindak at Netdania.com. Thumbnail images come from free use archive at Wikimedia Commons.

from brotherjohnf:

~TVR

SilverFuturist: Bid vs Ask Price on Kitco

Posted: 23 Nov 2012 06:31 AM PST

The bid price is how much the exchange will pay you for your silver.
The ask price is how much the exchange will buy your silver for.
The 2 prices are a little different, that is how the exchange (a business with expenses) pays its bills.
Nobody in the world is forced to use the Comex prices. Anybody can create their own exchange if they don't like the Comex.
You are free to ask for as much as you want for your silver, and you are free to make offers for silver as low as you want.
For individuals buying and selling silver back and forth, it is up to them to decide which price to use. If the buyer and seller are on even footing, usually they will take the average between the bid and ask price. Bullion goes for a premium because the Comex price is the price of silver atoms, while bullion is convenient and accurate weight and measurement that takes effort to create.

from silverfuturist:

~TVR

Godfrey Bloom: MEP on Germany's “golden opportunity”

Posted: 23 Nov 2012 06:28 AM PST

Episode 73: GoldMoney's Andy Duncan talks to Godfrey Bloom, who represents Yorkshire and North Lincolnshire in the European Parliament, and who is a member of the parliament's Committee on Economic and Monetary Affairs. They talk about the possibility of Germany instituting a gold-backed Deutschmark, and broader issues to do with European monetary and fiscal policy.

from goldmoneynews:

In a recent Mises.org daily article co-authored with Patrick Barron, Mr Bloom states that Germany now has a "Golden Opportunity" to get back to sound money by pulling out of the euro and introducing a gold-backed Deutschmark. However, given the lack of a comprehensive audit, suspicions about the integrity of the German gold reserves remain. Bloom therefore advocates that Germany should repatriate its physical gold from the storage locations abroad.

They also talk about monetary policies of the European Union, the errors of European politicians and whether or not the eurozone can be sustained. In addition, they also discuss Britain's relationship with the EU and Britain's own precarious financial position, particularly in relation to its welfare state and deficit spending.

This podcast was recorded on 21 November 2012.

~TVR

Bond bubble attracting more media attention

Posted: 23 Nov 2012 03:30 AM PST

December Comex gold futures gained 0.1% yesterday, as improved Chinese manufacturing data and hopeful noises from European politicians about the prospects of reaching an EU budget agreement helped ...

Rick Rule: Be a Risk Manager, Not a Reward Chaser

Posted: 23 Nov 2012 12:00 AM PST

The Gold Report met up with Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd, at the Hard Assets Conference in San Francisco. In this interview with The Gold Report, he...

Visit the aureport.com for more information and for a free newsletter

China May Launch a Gold Currency

Posted: 22 Nov 2012 11:00 PM PST

Practical Hawala Privacy Tips

Posted: 22 Nov 2012 10:30 PM PST

Run to Gold

Turkish Prime Minister Says that Gold should Replace the Dollar

Posted: 22 Nov 2012 10:16 PM PST

Why the Worst is Not Over For China’s Economy

Posted: 22 Nov 2012 09:38 PM PST

Yesterday HSBC released its 'flash' PMI estimate of manufacturing activity in China's economy. It rose to 50.4 in November, up from 49.5 in October. For the first time in 12 months, China's manufacturing sector expanded!

There was much rejoicing in stock markets around the world. The Aussie market jumped around 1%, Europe and most Asian markets rose too. The US, busy eating turkey for Thanksgiving, was more subdued. And Chinese stock market? It fell on the news. Hmmm...

The West has a knee-jerk response to 'good' news on China's economy. The Shanghai Stock Exchange, having a better view of China's maladjusted and credit bubble driven economy, is not so enamoured.

That China's manufacturing sector is enjoying a weak recovery is not in dispute. But it's the inferences made from this so-called 'recovery' that we caution against. The China bulls interpret it as a return to strong growth. The AFR says HSBC Greater China economist Donna Kwok 'is forecasting 7.8 per cent economic growth for China's economy this year and 8.6% next year, driven by infrastructure investment, domestic tax changes and subsidies that would help domestic demand.'

In other words, HSBC isn't betting in economic rebalancing. Rather, it's assuming more of the same stuff that generated China's past decade of record expansion, that is, infrastructure investment.

The bears, including us, think that's wishful thinking. The bears assume economic rebalancing will take place...that there will be less infrastructure investment, not more. If this doesn't happen soon, China's eventual day of reckoning will be that much harder. And in such a scenario, maintaining social order and Communist Party dominance will not be easy.

So best to get the rebalancing underway as soon and as subtle as possible.

But the bears also understand that whichever way you go about it, rebalancing will be a painful economic process.

We've babbled on about this plenty of times in the past. We've said the same thing in a number of different ways. But maybe not the way UBS's George Magnus does. Here's his view, courtesy of Alphaville (their emphasis, with which we concur):

'The maths are problematic. If investment is 50% of GDP and the growth rate falls from 15% to say, 5% per annum, consumption growth has to accelerate from about 8% to an unprecedented 12% per annum or so if the underlying GDP growth rate is to stay at 7.5%. You can do the maths of alternative scenarios at leisure, but the bottom line is that rebalancing requires investment to grow more slowly than GDP, and consumption significantly faster over an extended period of time. Otherwise the model isn't changing.

'The more structural reason is that the mechanisms that would allow consumer spending to strengthen further don't yet exist, and would, in any event, compromise the legacy sources of economic growth that have generated structural imbalances in the first place. For example, higher wages dent corporate profits and investment; higher interest rates and a stronger exchange rate help consumers, but to the disadvantage of companies, whose debt-servicing capacity would be compromised; pro-household tax, income and social security reforms have to be financed, one way or another, by companies, or the government.

'The issue, specifically in China, is more about the speed of capital accumulation, and misallocation of capital, given that, uniquely, the investment share of GDP has been in a range of 40-50% for about a decade now. Roughly two-thirds of the stock of capital has been built in the last decade, and half of infrastructure investment since 2000, for example, has been in transportation projects, many of which serve the same objectives, and must, for a while at least, be redundant or not viable commercially. And while total factor productivity growth, which is a measure of the efficiency of capital and labour utilisation, did rise strongly during the 2000s to about 4% per annum as the pre-imbalances capex boom gathered momentum, it has fallen back to around 2% per annum since.

'Once you frame the issue this way, it changes because rapid accumulation of capital goes hand-in-hand with the gradual, and then more rapid, accumulation of financial liabilities incurred to finance it. In other words, a rise in the credit intensity of investment. If you cast your minds back to the publicity in 2007-09 given to Hyman Minsky's explanations about how and why investment booms lead to instability, you're in for another treat in China. The essence of instability, by way of a reminder, is that over time, borrowers accumulate debt that becomes increasingly hard to service as returns to investment, profits, cash-flows and asset prices decay.'

That's a lengthy excerpt but we think it explains very well why you can't assume a China economic recovery happens next year...just because you think 'the worst is over'.

Don't forget, China just went through a credit bubble that was bigger than the US bubble that gave us sub-prime loans and a global credit crisis. Granted, China's less sophisticated financial system kept all the financial liabilities within the country (whereas the US spread its liabilities far and wide) so the fallout from China's bubble bust will be very different.

But there will be fallout nonetheless. And as Australia's largest trading partner, it will hit the Australian economy disproportionately hard. We've suffered the first round effects of the slowdown...lower commodity prices and sharply reduced expectations of the fruits of the mining boom. The second round effects depend much on how the new Chinese leadership handles the necessary economic rebalancing.

But don't forget, these men are just humans, not wizards. They can't conjure growth from nowhere and they certainly are not working with the same set of economic circumstances that the Politburo Standing Committee before them enjoyed.

That is, they don't have an abundant flow of economic growth enhancing liquidity to benefit from. Traditionally, this liquidity came via the yuan/US dollar peg. By maintaining an undervalued currency, US dollars would flow into China (representing China's trade surplus with the US...or the US's trade deficit with China).

In order to maintain the peg, the People's Bank of China (PBoc) would buy the US dollars and print new yuan (and therefore create liquidity for the Chinese economy). The PBoC would then buy US Treasury bonds with the proceeds of the US dollars, which boosted its foreign exchange (FX) reserves.

PBoC FX reserve growth became a barometer for China's liquidity growth, as well as an important source of US government funding.

But as CSLA's Russell Napier point's out in what he calls 'the most important chart in the world' (courtesy of ZeroHedge) China's FX reserve growth is non-existent. This is why the PBoC is very active in the market, doing lots of liquidity enhancing 'repo' transactions.

Napier says:

'It is the most important chart in the world. The growth in Chinese reserves has determined all the key developments in financial markets in the last two decades. It printed lots of currency and artificially depressed the US yield curve. It has been the cornerstone of global growth, and now it's over.'

So now that's over, we watch and wait for something to begin.

Regards,

Greg Canavan
for The Daily Reckoning Australia

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