This is an important statement from someone who is unlikely to be just a cheerleader. Here is the opening:
European Central Bank President Mario Draghi said the bank has averted a serious credit shortage and there are signs the economy is stabilizing, signaling policy makers may resist cutting interest ratesfurther for now.
"According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels," Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. While the debt crisis poses "substantial downside risks" to the economic outlook and the ECB remains "ready to act," Draghi gave no indication that another rate cut is imminent.
With the euro area on the brink of a second recession in three years, some signs of economic resilience have given the ECB room to assess the impact of its stimulus measures to date, which include lending a record amount of cash to banks. Draghi said those loans prevented a "serious" credit contraction. He also noted that borrowing costs for governments across the 17- nation region have dropped.
The euro climbed to $1.2790 at 4.40 p.m. in Frankfurt from $1.2739 before Draghi's press conference started.
My view - Fullermoney has maintained since November that the Eurozone crisis had passed its nadir in terms of its negative influence on other markets. If correct, and I think Mr Draghi is right, a change in perceptions has commenced relative to widespread yearend forecasts that the Eurozone would fall apart. Over the next year or two I think we will gradually hear less talk of the European crisis, at least in the present tense, and more references to the European recession. That will still be a problem, but less threatening for the global economy.
For tangible evidence that the transition has commenced, see Eoin's review of key European yield curves below.
Emails of the day (1 & 2) - On a comment I made yesterday, which was quoted at the beginning of the first email below, shown in italics:
"My view - Personally, I am less interested in writing about what has gone wrong with the monetary and political system during my lifetime. It is not good for my blood pressure; it bores the family and it would be delusional of me to think that I can influence, let alone change these global events.
"Instead, I am much more interested in finding a financial path through what can sometimes feel like a minefield. Usually, it is better than that, in which case the risk may be overconfidence rather than a paucity of opportunities."
"This defines you so much, and I confess I have a tendency to be a T Price too often, not seeing the market as an instrument but an occasion to judge. You are right on this and I am learning everyday, I am at it only since the past 7 years... May your work ethics guide you again to pursue the successes that you have already achieved."
"Your comments about Tim Price's piece, in Wednesday's Comment, really struck a chord with me. It's taken me many years to reach the same conclusion that I cannot control the political climate but I can choose and control how I relate to it and I choose to concentrate on my family's financial security. This is an area where I feel I have some degree of control and your service has certainly contributed to that end."
My comment - Thank you for these thoughtful contributions. I note in particular: "seeing the market as an instrument" (Email 1) and: "I cannot control the political climate but I can choose and control how I relate to it" (Email 2). These are wise words because we can only deal with the reality that markets provide.
Incidentally, I am an admirer of Tim Price, as I am sure regular readers of this service will have gathered. He has been successful in favouring both gold bullion and funds which invest in the sovereign debt of financially sound borrowers. He also speaks with a strong, clear and often witty voice in denouncing questionable financial policies, not to mention malfeasance.
Fullermoney occasionally comments on policies, particularly regarding governance but our main remit is to assist in empowering subscribers so that they are better able to navigate the markets.
Email of the day (3) - More on "It would be delusional of me to think that I can influence events", from Tim Price:
"A happy new year to you !
"I was struck by today's comment in your daily. I think you underestimate your influence. At least in the popular conception, it took just one young grocer in Tunisia to protest against state corruption (fatally, in his case) and a broader spark of protest and revolution was ignited across the Arab world.
"Edmund Burke said that all that was necessary for the triumph of evil was for good men to do nothing. I wholly concede that our primary remit is to help our clients and subscribers navigate through treacherous markets. I suspect the reason I keep coming back to scratching the itch of presumed historic causes of the crisis is that the problem is in large part political and a crisis of money itself; without a knowledge and familiarity of monetary history, and how the authorities have managed to steal, legally, from our pockets through state-sanctioned inflationism and the malign practice of fractional reserve banks and unsound money and unreserved credit, we have no defence against the future depradations to come.
"So I accept that political and economic agitation is not our bread and butter. But a degree of investor education on the topic of economic and financial prudence, without wishing to sound too high and mighty, I think is practically a moral imperative. The more that we can bring a broader number of investors into this debate and highlight what might be best practice in matters of policy as well as pure investment, the sooner we might emerge from a genuine crisis of financial and monetary mismanagement. A journey of 1,000 miles starts with a single step, etc. etc. I don't think we should feel compelled to lobby, but those of us with a 'bully pulpit' now have, I believe, practically an obligation to give this debate a wider airing. You may think "evil" is too strong a word to describe the economic and monetary mismanagement of our nominal authorities. In this instance I don't believe it is. The wealth and financial security of millions is at stake.
My comment - Thanks and well said, particularly regarding this summary:
"…without a knowledge and familiarity of monetary history, and how the authorities have managed to steal, legally, from our pockets through state-sanctioned inflationism and the malign practice of fractional reserve banks and unsound money and unreserved credit, we have no defence against the future depradations to come."
I agree and this is a key reason why I am very pleased to have permission to post your fine letter which has considerable educative value and is greatly appreciated by subscribers. Long may you continue to write with such insight and passion.
Returning to the theme of navigating markets, I unfurled my banner for Behavioural Technical Analysis in 1970, and Eoin now carries it very effectively in conducting The Chart Seminar around the world. Reaching my three score and ten next month, I am at the stage of life where I am no less interested in events, but recognise the finite nature of my energies. These have to be channelled to be effective and for Fullermoney, I would rather study the markets in the manner of a naturalist, on behalf of subscribers and with their considerable contributions to the Collective, than campaign for reform of the monetary system.
Industrial metals review - 2011 was a bearish year for industrial metal prices. What can we say about them today?
This item continues in the Subscriber's Area.
John Macintosh on corn - This item is in the Subscriber's Area. EU Iran Oil Embargo Said to Be Likely Delayed by Six Months - This item is in the Subscriber's Area. Additional commentary by Eoin Treacy
Demographics, Asset Cycles and Leverage Thanks to a subscriber for this rather gloomy report by Ajay Kapur and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section:
Why will China's property market case be different? We hear a few arguments. First, the state capitalism model and policy easing will somehow handle it. Second, urbanization will mitigate it. Third, household formation will likely increase by 100 million in the next ten years. Fourth, the mortgage/GDP levels are low. We think these are all flawed. On the first, policy easing and social housing polices can mitigate the issue, but the experience of Japan, Europe, and the US suggest that a combination of declining working-age population ratios (and more critically, levels), combined with starting points of over-leverage are exceptionally difficult to reverse. Sometimes, there is just too much property and leverage compared to the demographics
How about urbanization? Isn't this supposed to keep rising and lead to a lot more demand, thereby precluding any property downturn for too long? We find this story somewhat problematic. Almost all emerging markets have been urbanizing for decades now by this logic, property markets could never really go through rough times or crises by definition.
Having lived through enough emerging market property crises, we think the urbanization, so no property market issues argument is flawed. It is true that average household size is dropping in China, and projected to decline from 3.5 in 2000 to 2.9 in 2010 and 2.5 in 2020. That translates into 100m new households in the 2010-2020 period. Won't rising household formation lead to new residential property demand? Perhaps. But as Figures 16 and 17 show, household formation in the US and Japan has been rising monotonically for decades this did not stop two wrenching property bear markets in those two countries. This is a non-factor.
Oh, but mortgage levels are a low 20 percent of GDP in China. Yes, and they were low in Thailand (16% in 1997), Taiwan (20% in 1994), Malaysia (18% in 1998) when those countries had property downturns. A non-argument, in our view.
Conclusion This report has painted a somewhat dark view of the world. The cocktail of attenuating demographics in the developed world, and we believe soon in Greater China, substantial over-leverage, still-stretched property valuations, and elevated economic volatility is indeed a potent and different one. Most investors have seen nothing like this in their adult lifetimes. So, we are a bit more humble when we look at today's cheap equity valuations. All is not lost. With rising life expectancy, the working age could easily go up to 70 years or greater, from the 65 years that we have used in our calculations. More women could join the workforce (although they did this in the US, Europe and Japan and it did not make a difference to the bleak outcomes there). Productivity could rise with greater scientific breakthroughs and collaboration. Lastly, corporates worldwide are under-leveraged they could raise leverage, as governments and consumers gradually lower their leverage. We think that reading financial history going back a few centuries is going to be more enlightening than working on spreadsheet skills mastering Modern Portfolio theory beware the fallacy of misplaced concreteness. Being nimble and flexible will be key.
My view Demographics tends to be a thorny subject and everyone seems to have an opinion. The most important consideration in my view is that the data, to the extent it is reliable, offers clues to long-term potential trends rather than absolute prescriptions. Much can change in the course of a year, not to mind a decade. Migration, external demand and absolute supply of housing are all additional important considerations.
This section continues in the Subscriber's Area.
Spain Sells 9.98 Billion Euros of Notes, Twice Maximum Target This note by Emma Ross-Thomas for Bloomberg may be of interest to subscribers. Here it is in full:
Spain sold 9.98 billion euros of bonds maturing in 2015 and 2016, including a new three-year benchmark security, twice the maximum target of 5 billion euros set for the sale.
Demand for the new three-year benchmark bond was 1.8 times the amount sold, compared with a bid-to-cover of 2.7 the last time securities of a similar maturity were sold on Dec. 1, the Bank of Spain said.
The yield on the new benchmark, which matures in July 2015, was 3.384 percent, compared with 5.187 percent when Spain sold notes maturing in April 2015 at an auction in December.
My view The Eurozone's equivalent of the TED spread pulled back from approximately 150 basis points to 100 basis points following the sale of €450 billion in 3-year notes by the ECB in late December. So far this reaction is about the same size as that posted last summer. A decline below 100 basis points, held for more than a couple of weeks, would break the progression of higher reaction lows and improve the perception that the European banking sector is capable of functioning normally. Today's successful auction of Spanish bonds also helped to improve sentiment towards the region.
This section continues in the Subscriber's Area.
The Food Crises: A quantitative model of food prices including speculators and ethanol conversion Thanks to a subscriber for this interesting report from the New England Complex Systems Institute. Here is a section: Recent increases in basic food prices are severely impacting vulnerable populations worldwide. Proposed causes such as shortages of grain due to adverse weather, increasing meat consumption in China and India, conversion of corn to ethanol in the US, and investor speculation on commodity markets lead to widely differing implications for policy. A lack of clarity about which factors are responsible reinforces policy inaction. Here, for the first time, we construct a dynamic model that quantitatively agrees with food prices. The results show that the dominant causes of price increases are investor speculation and ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion. The model includes investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Claims that speculators cannot influence grain prices are shown to be invalid by direct analysis of price setting practices of granaries. Both causes of price increase, speculative investment and ethanol conversion, are promoted by recent regulatory changes, deregulation of the commodity markets, and policies promoting the conversion of corn to ethanol. Rapid action is needed to reduce the impacts of the price increases on global hunger. My view Fullermoney has long held the view that commodities were never meant to serve as long-term investments or assets. (Also see Comment of the Day on May 11th 2011).
Intuitively, if passive investors, buy and hold a comparatively large position in a relatively small market, they cannot but have an impact on price. In simple supply and demand terms, more buyers chasing comparatively limited supply drives prices higher. A Pakistani cotton trader at The Chart Seminar in Singapore last year recounted how the increased volatility had forced the exchange to widen its limits on outstanding contracts. This put severe pressure on those depending on the futures market for normal hedging activity. This is not an isolated case and has been experienced intermittently across commodity markets over the last decade. This section continues in the Subscriber's Area.
Email of the day on global agriculture:
I read the daily e-mail on energy supply with great interest [Ed December 6 th ]. I wish my humble position allowed me to afford to read the whole article, but I'm afraid I can't justify full subscription at the moment. The issue of increased Saudi domestic consumption, and indeed all other oil producing nations, and the upcoming energy crunch is intensely interesting. I've been involved in the environmental debate for 22 years, ever since I converted my farm to organic status. That seems a long time ago. One factor which Chatham House didn't consider is some of the other uses to which oil is used in great quantity, and critical. The major one of these is agriculture. As far as I'm aware, agriculture is globally responsible for around 25% of all hydrocarbon consumption. The range of ways in which we use it includes machinery, fertilisers, chemicals, and more. Then there is of course the energy consumed in the whole food chain, with in the UK over 20% of all goods on the road having a food connection. That's before we consider the ridiculous amount of fuel we are all consuming to get to the out-of-town supermarkets. "The point I would like to raise that I believe we can cut dramatically this agricultural consumption figure. If we all wasted less (currently around 30% of all food produced), consumed less and therefore reduced obesity and reduced the costs to the NHS of health-related problems from over-consumption, we will be making a massive stride in the right direction. If we also concurrently reduced/removed power consumption of any meat that is produced with the aid of grains and proteins (other than minor strategic requirements), we would also massively reduce the requirement for hydrocarbons in agriculture. With global population is constantly rising, and the dilemmas on how to feed them increasing, making these changes seems unavoidable to me. Instead of which, we have politicians, farming leaders and others constantly exhorting everybody to increase their production, saying we must do it "sustainably". I don't think they have any idea how this can be done "sustainably", and that they're asking for the impossible. "By making these policy shifts, we would also have two other advantages. Firstly, we would take the pressure off the dwindling supplies of phosphate fertilisers, which have the same finite supply line and therefore pressure points as oil. With phosphate, the key holder of global reserves isn't Saudi Arabia, but North Africa. I've attached a pictorial which was presented at the Oxford farming conference this week, on this. "The third critical area for resource demand and food production is water. With at least one of the 10 biggest rivers in the world now not reaching the sea, and with friction starting to build alongside key arterial waterways such as the River Jordan, Nile, etc, everything we can do to reduce demand on water has to be good, and agriculture is a massive consumer.. "I've also attached an article that I wrote for a government supported research institutions debate forum. "I hope you find this interesting and I apologise for sending you this when you weren't expecting it!"
My comment - Thank you for an interesting email highlighting an alternative attitude to the agriculture sector. A number of Fullermoney subscribers are farmers and I suspect share some of your concerns though perhaps not your solutions.
I agree that wastage is a terrible problem in many developed economies. We would all be a lot better off, both personally and economically, by reducing our consumption.
This section continues in the Subscriber's Area.
Speaking engagements in the USA I was invited to speak to the members of the Technical Analysis Society Singapore and the Australian Technical Analysts Association on my tour with The Chart Seminar last year. In fact, it was a subscriber, who is also an ATAA member, who suggested the tour in the first place.
I will be in southern California for approximately 10 days before making my up to San Francisco for The Chart Seminar. I will also be in New York for a few days before the New York Seminar. If you are a member of a local MTA chapter in those areas and/or a member of the TSAASF or AAPTA and interested in having me come speak to your association I still have space on my itinerary and would be happy to make time. The Chart Seminar 2012 Following a sell-out tour to Singapore and Australia last year, The Chart Seminar will be held in San Francisco, New York and London this year. Please be aware that the early booking rate for non- subscribers at the US seminars expires on January 31st. We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at . [email protected] The date and venues for my seminars so far in 2012 are: San Francisco - April 16th &17th 2012 Nikko Hotel New York - April 23rd & 24th 2012 at The Manhattan Club at 800 7th Avenue London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.