SA Post: Jim Rogers has Lost His Contrarian Edge.

In Commentary on May 21, 2011 by CQCA

“Jim Rogers is a legendary investor best known for establishing the Quantum Fund with George Soros. Since that time, he has authored multiple books on investing and life lessons. I respect his views very much, and enjoy his commentary. He often says “I have found in life it is better to be a contrarian, than not be.”

When it comes to China, though, he seems to have given up contrarianism for blind optimism. I would say the average person is optimistic towards China’s future economic development. Jim Rogers, instead of being a contrarian, has taken the role of captain of the cheer squad.” Read More…

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SA Post: March ’10 to March ’11 Money Supply Growth and Forex Moves.

In Commentary on May 20, 2011 by CQCA

“The U.S. Dollar has been taking a beating recently in forex markets (and by “recently” I mean since 2001). More attention than ever has been focused on the growth of the U.S. money supply, both M2 and the monetary base.

However, this focus has not extended to other currencies, as much. The M2 growth of five currencies, the Euro, the Dollar, the Yen, the Renminbi, and the Swiss Franc, is listed below.” Read More…

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Requirements and Incentives for Central Bank Deposits in Major English Speaking Countries.

In Money Supply on May 19, 2011 by CQCA

Why do some countries’ banks keep excess reserves? Much of the reason has to do with financial stability and the limited amout of options to invest such a large amount of money. There are also requirements and incentives for keeping reserves at the central bank.

The chart above shows the required reserve rate and interest paid on deposits at the central bank. The United Kingdom, Canada, Australia, and New Zealand do not have reserve requirements.

New Zealand pays the highest interest rate on deposits. In addition to not having a reserve requirement, Australia also does not pay any interest on deposits.

Banks are currently limited by what they can do with this money. Investing that in the stock market would be difficult and risky. There is currently no demand for mortgages or any traditional uses for bank credit. The only realistic market that could handle such a large movement of capital flow would be government debt.

In the above chart, the blue columns reflect the interest rate paid on deposits at the central bank. The red columns reflect the average one year treasury yield on local government debt.

Australia does not pay a deposit rate, and it also has the highest yield on treasury securities, therefore Australian banks have the most to lose by keeping their money at the central bank. In Canada and the United States, the central bank deposit rate is higher than the treasury yield, so they are actually making more money by keeping it on reserve at the central bank. I am not quite sure why U.S. and Canadian banks have responded so differently to essentially the same condition. I also do not know where Canadian banks have invested their money. It is possible that Canadian banks have purchased Canadian treasury securities with the expectation that yields will fall in the future, whereas U.S. banks are waiting for the yield on U.S. treasuries to increase in the future, and are therefore waiting.

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Bank Reserve Trends of Major English Speaking Countries.

In Money Supply on May 18, 2011 by CQCA

After the start of this financial crisis, U.S. bank reserves began to rise dramatically. The exact numbers were discussed in a previous post. Another post looked at Canada’s bank reserves, specifically.

The above chart shows the bank reserve trends of five major English speaking countries. The data was taken from each country’s central bank and indexed to January, 2007. Australian and U.S. bank reserves both increased by 100% between August, 2008 and September, 2008. Australian bank reserves increased to a factor of 23.86 (above the January, 2007 level) by December, 2008. They then decreased to pre-crisis levels by mid-2009.

Canadian bank reserves then spiked from an indexed rate of 1.09 in January, 2009 to an indexed rate of 40.46 by June of the same year. In other words, the amount of money held in Canadian bank reserves multiplied by a factor of 40 in six months. In less than a year and a half, Canadian bank reserves had gone from low to low in the chart shown above.

U.K. bank reserves were the next to spike up. They have remained almost level since that time.

New Zealand’s bank reserves only reached a high indexed point of 1.23 in November, 2008. In March, 2011, bank reserves were 27% lower than in January, 2007.

U.S. bank reserves are the only bank reserves to be at a higher rate now than at any time during the crisis.

Much of these reserves came from bank bailouts, also known as printed money. As this money gets loaned out, it then multiplies on itself. This process has already begin in Canada and Australia, but has not really yet begun in the U.S. or the U.K. If U.S. bank reserves remain in reserves, U.S. deposits will be the safest in the world. More likely, though, is that this money will eventually make it into the money supply and cause the money supply to expand at an uncontrollable rate.

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Eleven Currencies That Need to Be Devalued in Forex Markets.

In Money Supply on May 17, 2011 by CQCA

After I finished the calculations of the money supply data, I wanted to compare groups of currencies. The most useful one, I believe, is the difference in money supply growth between the U.S. Dollar and currencies that are pegged to it.

The U.S. Dollar has been inflated less than most other currencies in the world, although that is not saying much. Most freely floating currencies reflect the local countries’ monetary policies, but pegged currencies try to avoid supply and demand. Considering eleven of the currencies shown above increased their money supply by almost double, or more, the rate of the U.S. Dollar over the last five years, reality should indicate their forex value should have to drop.

This has already happened to the Venezuelan Bolivar. In January, 2011, it was devalued by almost half. This should indicate the direction the other currencies are headed.

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Happy Debt Ceiling Day!

In Debt on May 16, 2011 by CQCA

“I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.” —Treasury Secretary Tim Geithner, May 16, 2011 Letter to the 112th Congress.

It took 200+ years, but the U.S. federal government finally reached its debt limit of $14.294 trillion. Wanna know what else is crazy? The Treasury yield actually fell.

The blue line is the Treasury yield on April 15th, 2011, one month before the U.S. hit the debt ceiling. The red line is the Treasury yield on May 16th, 2011, the day the Treasury announced it had reached the debt ceiling. This means bond investors required a lower rate of return on debt issued by the United States government after it had declared de facto bankruptcy, than before. These people clearly deserve to lose all of their money.

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Gordon Brown for IMF Chief.

In Commentary on May 15, 2011 by CQCA

The current IMF chief, Dominique Strauss-Kahn, is sitting in jail now for attempted rape, and the New York Justice Department will not accept bail paid in SDRs.

Now the search is on for who will be the next IMF chief. Gordon Brown, the prime minister whose government was criticized by the IMF, has been actively campaigning for the post in 2012.

He’s the obvious choice to be a devalued managing director of a devalued monetary fund.

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Trade Flows and Currency Flows.

In Money Supply on May 14, 2011 by CQCA

The Census Bureau recently reported that the United States imported $48.2 billion more than in exported in March, 2011. For the first three months of 2011, the U.S. imported $140.6 billion more than it exported. If this is multiplied by four (to equal 12 months), our trade deficit for the year will probably be around $562.4 billion for all of 2011. The number was $495.7 billion in 2010.

At some point, the United States economy is going to have to create wealth to sustain itself, instead of consuming the rest of the world’s wealth. The good news is that between February and March, 2011, the United States imported $1.6 billion more capital goods, and $2 billion fewer consumer goods. These capital goods can then be used to produce more goods in the future.

The problem with increasing U.S. exports is that it will both improve and worsen its economic condition, in the short run. When the United States purchases a foreign good, U.S. Dollars go abroad. This allows the U.S. to export inflation. If a foreign country were to begin purchasing U.S. goods, they would most likely use U.S. Dollars. Foreign governments, alone, held $3 trillion in U.S. Dollar denominated foreign exchange reserves at the end of 2010Q4, according to the IMF.

If the United States were to turn around its trade deficit at the end of the year by exporting enough to close the projected $562.4 billion trade deficit, that would be a direct injection of half a trillion Dollars into the U.S. economy.

The United State’s domestic money supply (M2) surpassed $9 trillion in April, 2011. Increased exports would increase M2 by more than 6%. Although the U.S. economy will be creating more wealth by exporting more goods, the inflation that was pushed abroad in the past will come back home in the future.

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CPI Does Not Agree with the IEPI.

In Commentary on May 13, 2011 by CQCA

The Consumer Price Index for April, 2011 was released. The Bureau of Labor Statistic’s measure for “All Item” inflation was 3.2% annually.

One thing that stood out about this release was that it did not agree with another report released by the Bureau of Labor Statistics. The Import and Export Price Index (EIPI) was released on May 10, 2011.

The price of apparel increased .1%, according to the CPI. This is one of the lower increases for the categories that are tracked. According the the EIPI, however, the price of imported apparel increased 5.6% over the same time. Exported apparel also increased 8.2% over the same time.

How is it that the price of imported and exported apparel is going up, but the price of apparel in the United States is not going up? Once again, the only place prices are not going up is the CPI.

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China’s M2 Still Expanding Despite Reserve Requirement Rate Hikes.

In Money Supply on May 12, 2011 by CQCA

The People’s Bank of China announced that the reserve requirement for Chinese banks will be raised to 21%, effective May 18th.

Reserve requirements indicate how much money banks can loan out in relation to deposits. If $100 is deposited in a bank with a 50% reserve ratio, then $50 can be loaned out. The problem with this that now two people have a claim on that $50, the depositor and the debtor. Since two people have claims on the same amount of money, the total amount of “money” in the system has increased by $50, or 50%. However, it does not stop there. The debtor will most likely use that $50 to purchase a good or service. The person that receives the money for delivering that good or service will most likely deposit it in a bank. Another bank can then take that $50 and loan out $25 (because there is a 50% reserve requirement on the deposit). The money supply now stands at $175. This process will continue until that original $100 turns into $200. This is pure inflation, and represents no real increase in the wealth of the society.

The only way to stop this system is to have a 100% reserve ratio. In this case, the amount of credit in the system represents the amount of savings in the system. However, even a 50% reserve requirement this day and age is unheard of. The current rate for the U.S. is 10%. This means that $100 deposited in U.S. banks turns into $1,000.

China is trying to increase its reserve requirements to decrease inflation. However, this does not seem to be working.

In January, 2010, Chinese M2 stood at 62.5 trillion Renminbi. In March, 2011, after multiple reserve requirement hikes, Chinese M2 stood at 75.8 trillion Renminbi. This represents a 21.28% increase in a little over a year. Where is China’s new money coming from?

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