Harry Newton's In Search of The Perfect Investment, Technology Investor. Harry Newton
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
This image is
from AmericanBullion. I like
This is from their
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.
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
The BIG article
of this week is Nouriel Roubini's opinion piece in the Financial Times
(the pink paper). Here are excerpts:
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.
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.
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 Feds 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
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.
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
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:
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.
are still down from record highs and equity markets arent 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.
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 hes not
buying stocks now, though he may buy more gold.
Rogers said, when asked if he agreed with Roubinis view. Its
clear Mr. Roubini hasnt done his homework, yet again.
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.
a Good Year
Roubinis arguments by saying that Chinese stocks and sugar, silver,
coffee and cotton have all dropped from their historical highs by at least
When asked if
gains made this year pointed to a bubble, he said: Its not a bubble
if something is up 100 percent this year, but down 70 percent from its high.
Thats not a bubble, thats a good year. Thats a great year.
Maybe its too high for this year, but thats not a bubble.
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 Indias
central bank added to its bullion reserves.
its 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 well certainly get there some
time in the next decade.
with Roubini that the dollars 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.
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 its going to happen again this time.
will it last? I dont know, he said. It depends on how the
world evolves. Somewhere along the line, I expect Ill have to sell the
rest of my dollars.
know any emerging market stock markets that are so high Id call them
a bubble, Rogers said. Theyre certainly all up a lot, maybe
theyre too high, but being too high is not a bubble for anyone who knows
to Roubini, Rogers said the only bubble he sees in the Western world now is
in U.S. bonds.
conceive of lending money to the U.S. for 30 years, he said. Other
than that, I dont see any bubbles going on, unless he knows something
the rest of us dont know.
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.
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.
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 thats 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 todays exchange
rate). Deliveries are being made now. Call your black-market doctor
for an appointment.
love this piece of Photoshop.
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?
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
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