Emerging market central banks

Where are sovereign central banks of emerging market countries investing their reserves? Traditionally, it's been US Treasuries. They are now diversifying away from USDollar-denominated assets.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002252/china-gold-and-the-civilization-shift/

With central banks from India, Sri Lanka, and Mauritius already purchasing gold from the IMF, other sovereign central banks are also rumored to be stepping up to the gold window. This includes China, Germany, and Russia.

http://www.bloomberg.com/apps/news?pid=20601083&sid=at5XsdLU.68w

A foreign perspective of the global credit crisis

It includes opinions on bail outs, currency debasement, and central bank intervention.

Precious metals as an asset class

Relative to other asset classes, the gold and silver sectors are minuscule. If and when precious metals and resource mining companies become popular, the rush into these tiny sectors will drive up prices, as supply won't be able to keep up with demand.

http://dailyreckoning.com/how-to-invest-in-gold-mania/

Disclosure: long gold and silver mining shares.

Dr. Doom gets even gloomier

Here is Dr. Marc Faber's latest forecast. Hide the wife and kids.

http://www.bi-me.com/main.php?id=42214&t=1&c=35&cg=4&mset=1011

The $1.8 trillion question

Quick--what does the acronym "ABCPMMFLF" stand for? In a banking world gone mad, when opaqueness trumps clarity, and complexity usurps simplicity, deception becomes masked by confusion.

http://www.bloomberg.com/apps/news?sid=aAmfkLEyMPYM&pid=20601109

By the way, so there's no misunderstanding, it stands for: "Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility." Here is proof from the Fed's own website:

http://www.federalreserve.gov/monetarypolicy/abcpmmmf.htm

Government agencies have a real love affair with the alphabet soup when they want to confuse the public--or hide the fact that they are buying toxic bank assets on behalf of the American taxpayer.

Iran goes nuclear

With Iran upping the ante on nuclear weapons, all bets are off on equities--maybe this is the event that triggers end-of-year selling, as mutual fund managers lock in profits to pad their bonuses. With the likelihood of Congress accelerating the repeal of the Bush tax cuts in 2010 instead of waiting for 2011, investors may do the same profit-taking as well, choosing to pay capital gains taxes of 15% instead of 28%.

In other words, the expected annual Santa Claus rally may end up an ugly rout instead. I don't know--I don't have a crystal ball on the stock market overall, and I would posit most people don't either--on the timing or direction. Some may get the direction right--but go broke waiting for the reversal. And very few people can time the markets in the first place.

If Ahmadinejad's regime continues to flout sanctions and conflict breaks out in Iran, Pakistan, and/or India, the shock to oil and eventually gold will make last year's run up seem tame in comparison. Equities worldwide will plummet, as Russia and China have many trade ties with Iran. Wall Street does not appreciate uncertainty.

Any dire consequences will be bullish on oil and gold, even if the initial shock may tank all assets, except the rush to safety toward the USDollar and US Treasuries. Longer-term, this flight to safety will prove wrong-headed, because another military conflict means the Fed has to print even more dollars, debasing the currency further.

Iran is a major oil producer, so any shocks to supply will also drive up the price of oil and precious metals. Let's hope Iran is barking and not biting.

James Turk on the "bubble" in gold

According to James Turk, we are entering the 2nd phase of gold's bull market. The mania-driven third phase has not come close to arriving yet.

http://www.fgmr.com/stage-two-of-golds-bull-market.html

Banks and currency

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

- Thomas Jefferson, 1802

Bill Bonner from the Daily Reckoning

Debt, debt, and more debt...

http://dailyreckoning.com/freak-show-2/

John Doerr on Cleantech

Why is John Doerr's opinion important? His firm made prescient bets on biotechnology and the internet. And they are placing bets on cleantech. See the benefits and challenges going forward. Editor's note: I agree with the virtues of clean technology, but I am not convinced cap and trade legislation is prudent. We'll have to wait and see on energy policy.

John Doerr's Take on Cleantech

By Nick Hodge
Tuesday, November 24th, 2009

I spent last week in Silicon Valley, literally bumping elbows with some of the smartest people in the finance business.

I heard from Vinod Khosla and Steve Westly, pioneers of Sun Microsystems and eBay, respectively.

And I personally spoke to John Doerr, who was in on the venture level of companies like Compaq, Amazon.com, Intuit, and Google.

Now that the Internet is maturing — and these men have walked away with billions — they're turning to cleantech.

You see, all these billionaires know that clean energy is the next great profit frontier. And they aren't ashamed of it. They know a fortune can be made while doing something that benefits humanity and the planet.

Over the next few weeks, I'll share some of the insights I gained by listening to what they had to say. Today, we'll start with a recap of John Doerr's thoughts on the cleantech industry.


"It's More Clear Every Day"

That's what Doerr had to say about this statement: Cleantech is the largest economic opportunity of the 21st century.

And here's how he backed it up...

The billionaire venture capitalist likens cleantech to the Internet. Only, he says, the Internet is a $1 trillion industry serving 1.2 billion people... while energy is a $6 trillion industry serving 4 billion people.

So cleantech has the chance to be at least 4 times bigger than the Internet.

The Last Great Network

Think of it like this: Clean energy really has the chance to be the last great network.

Railroads were first, followed by the highway system. Then came phone, cable, and electricity transmission networks. All followed by the Internet.

But cleantech — through the smart grid — is becoming the next great network. Homes and neighborhoods will be linked together through smart networks and devices... all talking to the utility... providing real-time data allowing for the easier introduction of renewably-produced resources.

And fortunes will be made as it happens. That's why these mega-investors are foaming at the mouth.

Thing is, there are still a few hurdles remaining. Doerr did his best to identify them and provide ideas for how to overcome them.

An Environment that Fosters Innovation

According to Doerr, the main hurdle facing cleantech is its capital intensity.

He said it took $25 million and 3 years to bring Google to an initial public offering (IPO).

Compare that to Bloom Energy, a Doerr-backed fuel cell company. Bloom has already gobbled up $250 million and seven years. Doerr said it'll be nine years before they think about an IPO, even though it has "substantial revenues and orders."

According to Doerr, there is simply more "capital required to grow a great green company." And that's what has delayed major investment — both public and private — thus far.

The intense need for capital has created an equally intense lack of investment will. And, at least in the U.S., Federal policy hasn't really done much to help.

Technology-specific subsidies and lobbyist-inspired energy policies have left us far behind our European and many Asian counterparts.

Instead of subsidizing the lobbyists' favorite technologies... we need to create a policy environment that fosters innovation, namely by putting a price on carbon either through a tax or cap-and-trade.

Again, Doerr turns to the Internet for an analogy.

When the Internet emerged from military application into the public realm, it wasn't Congress deciding the way forward. Could you imagine if they subsidized dial-up while stymieing DSL or cable? We'd all still be stuck with modems.

Similarly, energy policy needs to evolve. Winners need not be chosen by politicians, but by economics.

And failing to do that is one of the main reasons the U.S. remains a laggard in clean technology.

Think about the year 1996. Where were the top Internet companies based or founded? All in the U.S.

Now think about the top solar, wind, and battery companies... Mostly European and Asian locales come to mind.

It's not only sad for our country — it's dangerous, with respect to both energy and economic security.

Doerr's Last Words

This lack of political steadfastness has led to "woeful underinvestment" in clean energy. And that's part of the reason we're now giving stimulus dollars to overseas firms for wind turbines and other clean technologies.

Europe is literally 10 years ahead of us. Early adoption is the reason the tiny country of Denmark exports billions of dollars worth of wind turbines annually.

Doerr was hopeful, though. He's going to keep investing because he sees an upside to multiple bottom lines.

And while he doesn't favor subsidies for any one sector, he did have three policy suggestions:

"Put a price on carbon. Put a price on carbon. And put a price on carbon."

Only when businesses don't have the right to treat the atmosphere like an open sewer will there be meaningful migration away from fossil fuels.

That's what Europe did. And look who we're now paying for wind turbines.

IT infrastructure investments

Information technology (IT) infrastructure investments by Wall Street investment firms are approaching $3.6 billion annually. By contrast, the U.S. Commodities Future Trading Commission (CFTC) has an annual IT budget of $23 million--which makes it difficult for them to monitor and regulate derivatives trading. Their servers, bandwidth pipes, storage, and overall IT infrastructures are slow, old, inadequate, and obsolete.

It's analogous to highway patrol squad cars having a top speed of 160 mph, rendering them impotent to catch speeders averaging 1000 mph. The software algorithms and quantitative analysis investment firms perform are fast enough (and getting faster) to stay ahead of the watchdogs.

Financial derivatives are useful in hedging strategies and increasing potential returns on investment, but they can also be weapons of massive financial destruction when leverage is abused. And algorithms can spin out of control when asset bubbles burst. The race to be ahead of everyone else sometimes causes the mutual destruction of algorithms gone bad, as self-fulfilling negative outcomes beget other larger losses.

The regulatory path has become increasingly futile as Wall Street computing capabilities increase geometrically with Moore's Law.

Free market proponents epouse minimum regulation, with a mantra of caveat emptor, but cases of fraud and market manipulation should be regulated and prosecuted to the full extent of the law. Rigged markets and lack of transparency hurt markets long-term, as investor distrust of manipulated markets cause participants to stop trading. Without investors, markets disappear.

Estate planning

With families huddled together, many memorable moments are being shared. Among the laughs and pleasant recollections, the topic of family estate and legacy planning may inevitably come up. It shouldn't be unpleasant or neglected--all families go through transition, and it's best to address these issues honestly and coherently. Here are a few FAQs on estate planning.

1) Why is an estate plan important?
Your estate could potentially dissipate due to taxes and other transfer costs. An effective estate plan reduces estate taxes and probate costs, and enables you to leave a legacy to those important to you.

2) What are the benefits of an effective estate plan?
- Competent asset management in the event of disability.
- Efficient distribution of estate to beneficiaries.
- Reduction of transfer costs and probate costs.
- Asset preservation.
- Maximize tax exemptions.
- Gifting.

3) What transfer costs will your heirs incur?
- Estate tax.
- Gift tax.
- Inheritance tax.
- Income taxes on annuities and qualified retirement accounts.
- Generation-skipping transfer tax.
- Probate costs.
- Professional legal and accounting fees.

4) What are the components of a basic estate plan?
- Unlimited marital deduction.
- Will.
- Credit shelter trust (exclusion amount).
- Living will.
- Durable power of attorney.

5) What can be done to reduce an estate tax liability?
A lifetime gifting program can reduce the size of your estate.

6) What is an ILIT, and what are the benefits?
An irrevocable living insurance trust is created to establish ownership of a life insurance policy such that the proceeds received by the trust are not subject to estate or income taxes upon death of the insured. An ILIT takes advantage of the gifting exclusion and generation-skipping transfer tax exemption, and provides the beneficiaries protection from creditors.

7) What is a Dynasty Trust?
A dynasty trust is an ILIT that can provide protection from estate, gift, and generation-skipping transfer taxes when children and grandchildren die.

8) What other types of ILITs are there?
Spousal ILIT, Single-life spousal ILIT, Survivorship spousal ILIT, Sale to a grantor trust.

9) What options do you have for charitable giving?
Gifts to charity, a charitable remainder trust, wealth replacement trust, charitable lead trust, private foundation.

10) What options are there for estate planning for a family business?
A limited partnership and limited liability company can be integrated into an estate plan to reduce gift and estate taxes, while enabling a successful transition to the next generation. A grantor retained annuity trust can be used to transfer stock, while a qualified personal residence trust can be used to transfer a home into the trust.

11) Who should be part of your team of advisors for effective estate planning?
- Estate attorney
- CPA accountant
- Financial advisor
- Life insurance agent
- Trust officer

Please consult with your team of professional advisors when setting up an estate plan.

Buying the dip

As expected, equities and commodities got pounded over Thanksgiving as word of Dubai's default spread worldwide. I bought the dip, this time a silver mining company in China. See disclaimers in the side bar.

Disclosure: long SVM shares

Bernanke's dilemma

Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are walking a tightrope. Keep interest rates low and keep the printing presses humming along are stimulative to the economy and help exporters remain competitive. But it also induces asset bubbles and devalues the USDollar.

Raise interest rates and tighten monetary policy, and equities and bond markets will tank, roiling any chance of an economic recovery.

The 800-pound gorilla is the huge debt--and servicing that debt, which increases the deficit--which forces debt monetization again. And round and round we go...

http://www.nytimes.com/2009/11/23/business/23rates.html?_r=1

Dubai defaults

Dubai is attempting to renegotiate its debt with its creditors, which is essentially a default. Equity markets worldwide tanked, as did commodities, while the USDollar rallied in a flight to safety.

http://www.ft.com/cms/s/0/554a5c30-da50-11de-9c32-00144feabdc0.html

NBC for sale?

General Electric, parent of NBC Universal (with properties MSNBC, CNBC, etc.), is apparently looking to sell its network media asset. A potential suitor is Comcast, with GE CEO Jeffrey Immelt negotiating with Vivendi on a fair valuation and exit strategy.

Perhaps GE Financial Network--er...CNBC will now have a more neutral, balanced view on markets.

http://www.benzinga.com/markets/company-news/46197/sale-of-nbc-universal-to-comcast-close-after-ge-and-vivendi-talks-ge-cmcs

The larger question is how GE will remain solvent as it is forced to unload valuable assets. NBC is not the problem--the toxic mortgage loan portfolios on its book are.

Dennis Gartman on CNBC

Dennis Gartman, the respected commodities expert who pens the widely read "The Gartman Letter", and who can been seen on CNBC every day, called a top on gold at $930. When gold surged to $1050, he said he was still bearish on gold, yet he had reversed course on his own trade, and had gone long due to technical momentum (presumably after losing a ton of money shorting gold at $930). He also declared gold was in a "bubble"--even as he confessed he had gone long--and that he just didn't understand why gold had rallied so high and so fast. Today, in overseas trading, while America gluttons on turkey and dressing, gold is threatening $1200.

So this is a guy who can barely admit he was totally wrong on gold, costing followers millions of dollars, and now he can glibly declare gold is in "bubble" status--without even looking at the fundamentals of not just the recent rally, but of a DECADE-LONG BULL MARKET IN GOLD?

What about US Treasury bonds? The trillions of IOU's being issued by an insolvent government will come due at some point, and that is not a bubble? What if the creditors of that debt reject taking on that risk at yields of 3%, and demand 15% before even considering buying more Treasuries? What about that bubble? Rising interest rates will tank bond values, much like they did in the early 80's when inflation and deficit spending were out of control. Deficits are much worse today--in the trillions, with a "t".

And what if the US government itself defaults on its borrowings, unable to fund even the interest on that debt? What will happen to the asset values of hard commodities? How high could gold or oil climb in dollars?

Yes, the Fed's quantitative easing will yet again create asset bubbles. But as usual, the investing public will get fleeced again because the bankers are pointing at the wrong "bubble."

Dubai defaults on its debt

Dubai, once the poster child of excess in the Middle East, is defaulting on its debt. Equities and bond markets worldwide were rocked on the news. Unfortunately, this won't be an isolated case going forward, as many emerging and developed countries are on the brink (including the US).

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRsjlClzl500

Happy Thanksgiving.

Apropros quotes from Albert Einstein

"We can't solve problems by using the same kind of thinking we used when we created them."

- Albert Einstein

"The hardest thing in the world to understand is the income tax."

- Albert Einstein

You can never solve a problem on the level on which it was created.

- Albert Einstein

This should be part of the government's playbook in solving our economic problems.

Solving a debt crisis with more debt is not a viable solution.

Emerging markets stepping up to the gold window

Foreign central banks are snapping up gold bullion for their reserves for several reasons. Foremost is their diversification away from the USDollar, as too much exposure to the sinking dollar has caused their asset values in reserves to decline. Their economies are stronger relative to developed countries, so they need to boost their gold reserves accordingly to reflect their newfound economic health. In other words, their strong currencies need to be backed by gold vs. the USDollar.

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=8970ea5d-3ab9-4ad2-87a8-f76cca63c961

In the past, central banks could sell their gold holdings, in order to suppress the price of gold, as low gold prices enable sovereign governments to borrow at low interest rates. This support allows governments to run perpetual deficits and reduces their debt obligations in the form of low-yielding bond issuance.

But with mounting fears that governments worldwide are reckless in their deficit spending--debasing ALL currencies in the process, gold as re-emerged as a safe haven for monetary store of value.

In another article, the Reserve Bank of India hinted at buying the balance of the IMF's planned 403.3 tons of gold, of which 201.3 tons remain. India purchased 200 tons two weeks ago in a surprise move, as most observers expected China to buy the bulk of the planned sale. However, purchase of the IMF gold by ANY central bank is bullish for the yellow metal, as it further validates central bank net buying--not net selling.

http://www.mydigitalfc.com/plan/india-plans-buy-more-gold-imf-410

Supply side of gold

There has been much focus on the fundamentals of the rally in gold prices, mostly on increasing demand for nonmonetary (jewelry, art, industrial) and monetary (investment) reasons. Gold has a consistent record of having store of value over centuries, and has been a useful hedge against inflation, financial crises, and currency debasement.

But the supply side of the equation hasn't been addressed by the mainstream financial media. The bullish case on the supply side is equally compelling. Gold production peaked in 2001 and is in steady decline, despite much higher prices. Higher demand and lower supply can only have one long-term outcome.

http://www.brisbanetimes.com.au/business/miners-were-running-out-of-gold-20091125-jqqy.html

Gold missing in Canadian mint

Back in June, after an audit by Deloitte & Touche discovered $15 million of missing gold bullion, the Canadian Mint called in the Royal Canadian Mounted Police for an investigation. It turns out mint official "double-counted" gold sales by mistake.

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20091124/mint_mystery_091124/20091124?hub=TopStoriesV2

I'm not buying it, as central banks are notorious for performing gold swaps, and leasing out the same gold ounce multiple times to each other, in a surreptitious gold and silver price suppression scheme (scam).

The Canadian mint has now agreed to an independent audit of their precious metals inventory every three months--which is a big change of policy and one that contrasts sharply with the US Federal Reserve Bank. The Fed's gold reserves haven't been independently audited since 1953, which means no one has any idea how much gold is in the vaults of Ft. Knox, Kentucky and the Federal Reserve Bank of New York.

FDIC is broke

The FDIC isn't almost broke--it IS broke.

http://www.fdic.gov/news/news/press/2009/pr09212.html

The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September...

First India, now Russia

The Indian central bank shocked the financial community when they snapped up 200 tons of gold from the IMF's planned sale of 403 tons, as many observers believed the Chinese central bank would be the largest buyer. A few other central banks have since purchased gold on the open market, or from the IMF.

Russia's central also has been accumulating gold into their reserves, as has China's central bank, which has doubled its gold reserves since 2003.

http://in.reuters.com/article/fundsNews/idINGEE5AM1A020091123

HSBC kicking out retail customers holding gold

According to the Wall Street Journal:

Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze.

Amid gold's rise -- it has gained 32% this year and reached a record on Monday -- investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.

HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City's Fifth Avenue.

HSBC and other banks don't earn fees from clients buying physical gold and silver. I guess that's why they kicked clients out of their safety deposit boxes.