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Harry Newton's In Search of The Perfect Investment, Technology Investor. Harry Newton

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9:00 AM EDT, Wednesday, November 4, 2009: This is gold over the past five years. It's done very well.

There are many people who believe it's going to $2,000 as the U.S. dollar weakens further and people flee it to gold.

I don't believe this is a slam dunk. The dollar will recover as our economy recovers, which it clearly is.

You can smell what's happening here. Yesterday I received my first sales call from a firm peddling gold coins. I was offered a one-ounce gold coin for $2,800 -- nearly three times what an ounce of gold is selling at. When I questioned that, I was told it was the "condition" of the gold coin that made it so valuable. It was clean, pure, not scratched and neatly packaged. If I bought it and had to sell it back the next day to them, how much would I lose? About 15% was the answer.

This image is from AmericanBullion. I like the slogan.

This is from their site:

I would not buy gold coins. I would not put my entire meager money into gold. But I do believe it has a place. I continue to like the GLD.

Another bubble. Our brilliant government drops interest rates to nothing in the hope that businesses will borrow, build factories (or whatever) and employ zillions of people. It doesn't work that way. It just starts another bubble. (Think housing bubble of 2003-2006). Today, the banks (and the hedgees) use the government's cheap money for trading and make money off our government's idiocy.

The BIG article of this week is Nouriel Roubini's opinion piece in the Financial Times (the pink paper). Here are excerpts:

Mother of all carry trades faces an inevitable bust
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The full Roubini article is here. It also explains how the carry trade works.

Jim Rogers thinks Roubini is full of do-do. In today's Bloomberg:

Rogers Says Roubini Is Wrong on Bubbles as Gold, Stocks Rally
Nov. 4 (Bloomberg) -- Jim Rogers, the investor who predicted the start of the commodities rally in 1999, said that Nouriel Roubini is wrong about the threat of bubbles in gold and emerging-market stocks.

Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.

Roubini, the New York University professor who warned in 2006 about the coming financial crisis, said on Oct. 27 that investors are borrowing dollars to buy assets and creating “huge” asset bubbles. Rogers said that he’s not buying stocks now, though he may buy more gold.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

Roubini told a conference in South Africa last month that investors were doing “the mother of all carry trades” by buying assets with borrowed dollars. He said emerging-market equities are showing a bubble, that gains in some developing- nation currencies are becoming “excessive” and that the rally in oil is “not justified by the fundamentals.”

The MSCI Emerging Markets Index has gained 62 percent this year and crude oil has risen 47 percent.

‘That’s a Good Year’

Rogers countered Roubini’s arguments by saying that Chinese stocks and sugar, silver, coffee and cotton have all dropped from their historical highs by at least 50 percent.

When asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.”

Gold climbed to a record $1,095.40 an ounce in London today, a 24 percent gain this year. Gold also reached a record in New York as the dollar fell and India’s central bank added to its bullion reserves.

“I suspect it’s going to go over $2000 some time in the bull market, but depending on what happens in the world it could go much, much higher,” Rogers said. “The old high, back in 1980 adjusted for inflation, would be over $2000 now, just to get back to the old high. So we’ll certainly get there some time in the next decade.”

Dollar Pessimism

Rogers agreed with Roubini that the dollar’s decline was encouraging investors to buy more commodities and assets. The U.S. currency has dropped 13 percent since the start of March against a trade-weighted basket of currencies.

“Right now, everybody including me is pessimistic on the U.S. dollar,” Rogers said. “That usually leads to a rally, whatever the asset is, and I would just suspect it’s going to happen again this time.

“How long will it last? I don’t know,” he said. “It depends on how the world evolves. Somewhere along the line, I expect I’ll have to sell the rest of my dollars.”

“I don’t know any emerging market stock markets that are so high I’d call them a bubble,” Rogers said. “They’re certainly all up a lot, maybe they’re too high, but being too high is not a bubble for anyone who knows financial markets.”

In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds.

“I cannot conceive of lending money to the U.S. for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”

Another scam: By law, each of us in entitled to a free credit report from each of the three big credit reporting agencies. Personally I've never been able to get mine. Every time I try to sign up, they try to snag my credit card. And I know they'll then charge me $14.95 a month forever. It's a scam. Of course, most of us are on top of our bills and don't really need our credit report. The New York Times did an investigative piece on this unsavory, misleading business. Click here.

Use your iPhone while overseas. The iPhone is a GSM phone. That means it works most everywhere overseas. If you use your domestic AT&T account to make calls abroad, you'll be in the poor house. A better trick is to get someone to unlock your iPhone and replace its AT&T GSM SIM card with a local prepaid one you buy at any newsagent overseas. Here's how to remove the SIM card. Doing this involves zero technical skills.

If you need to ask, you can't afford it. This is the new Lamborghini Reventón Roadster.

The car does 0 to 62 mph in 3.4 seconds. It tops out at 205 mph. But the most important number is 20. As in that’s precisely how many Lamborghini will build. How much? According to Wired Magazine, "About 12 times what your kidney would fetch on the open market. The Reventón Roadster will go for 1.1 million Euros before taxes (about $1.6 million at today’s exchange rate). Deliveries are being made now. Call your black-market “doctor” for an appointment.

I love this piece of Photoshop.

Favorite email of the week.

Hello Mr. Newton,

I am looking for a buyer for an a very unique estate in Israel. I believe buyer should be forign jew with zionist ideas. can you help or guide as to where I would find a descreet aristorcrat wealthy buyer?


Dear DS,

Do artistocrat wealthy buyers still exist?

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse any, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. Read more about Google AdSense, click here and here.