USD, por favor

"Nouriel Roubini... said the Brazilian, Chinese and Indian economies may be overheating and developing asset bubbles."

via Bloomberg

"With excessive levels of debt and contractionary monetary and fiscal policies in place, inflation will continue to moderate, thereby driving long term treasury yields lower."

Van R. Hoisington
Lacy H. Hunt

When whatever is the "it" trade, I tend to have the urge to find out why it should not be. If shorting Treasuries is "it", why not spend some time in deliberation of the alternatives? What if BRICs do slow down for a while? What if hyperinflation does not happen? How much of the upside is left in gold?

But not in China

Recently, I came across an interesting post on Michael Pettis’ blog, called “Chinese savings and the wealth effect”. Under consideration is how Americans and Chinese react to changes in the interest rates. When interest rates rise, Americans tend to increase their savings and consume less. Interestingly enough, Chinese do the opposite. They actually put away less and consume more. When interest rates fall, Americans save less (consume more) and Chinese save more (consume less).

Apparently, it works like this: most Chinese save via bank deposits, not investments. They keep a certain interest rate level in mind they know will allow them to save a certain amount of money in the future. When banks’ deposit rate goes down, they want to save more “to compensate”. As a result,

“Declining interest rates in the US usually (but not always) mean that Americans feel richer because the market value of their homes, stocks and bonds has risen. Declining deposit rates in China usually mean that Chinese feel poorer because the return on their savings relative to their implicit discount rate has declined.”

Rooster today, feather duster tomorrow

"...investors are going to be reassessing global growth, and reassessing the ability for governments to stimulate economies to take up the slack from lack of consumer consumption. So I think this affects the growth rate that people are going to be using for the global economy. And, in that way, it affects all nature of global investments."

Jeffrey Gundlach

I have been paying attention to Jeffrey Gundlach for a while now. If anything, his arguments make sense to me. And then, as my mind drifted into thinking about markets, Mark Mobius appeared on Blooomberg and said that:

“Despite the fact that a lot of people think that we are entering into a bear market, we don’t believe so. This is a correction in an ongoing bull market.”

Mark Mobius

Whoa… wait. This is interesting. Mark Mobius is an accomplished authority in the investment world. And he is bullish on BRICs. Well. Let's look briefly into one of them. To use a Yakov Smirnoff's antimetabole, in America, you buy oil. In Russia, oil buys you. Let’s say it slowly: one…trick…petro…pony.

"In the near-term, the pace of Russia’s recovery will depend to a large extent on the path of oil prices... But a more likely scenario is that oil prices fall back as the pace of global recovery ultimately disappoints and the dollar rebounds further."

via RosBusinessConsulting

By the way, I am not saying that investors should never invest in Russia. If you know really well what you are doing, then by all means, give it a try. But sadly, Russia's EBITDA is highly cyclical, maintenance capex is high, personnel is shrinking to the tune of 1 million/year, the product (energy) is not proprietary, and historically, it is known to be a rather unstable shop. Yes, the 7-10 percent debt/GDP ratio looks decent. But I would make a wild guess that it’s just because very few brave souls would extend credit. And this is just a tip of the iceberg of issues. So…will US-induced deflation kill commodities and possibly disappoint Mr. Mobius on the Russian front?

"All are not cooks who walk with long knives." Another Russian proverb.

Market Sentiment

"Equity funds had outflows of $6.68 billion in the last week, compared with outflows of $12.51 billion a week earlier.

U.S. equities had outflows of $4.79 billion, while $1.89 billion was withdrawn from foreign funds.

At the same time, bond funds took in $184 million, compared with outflows of $989 million the previous week, said ICI. Taxable funds had outflows of $729 million, while municipal ones added $913 million."

WSJ

Stocks: out of favor.
Bonds: out and then back in. Investors like Munis... and possibly cash?

I think that there is a palpable demand for an all-weather "safe" asset class. Treasuries do not seem to be quite "it" anymore. Gold is liked but may be experiencing too much of its own Renaissance (some say its getting ahead of itself, some say there is more room to run). Everything still seems to be kind of expensive. Do European stocks look a bit more attractive now from a relative valuation point of view?

Paper vs gold

How about “The Investment Performance of Collectible Stamps”?

In a recently published paper, Elroy Dimson of London Business School and Christophe Spaenjers of Tilburg University investigate the returns on British collectible postage stamps and conclude that during the period of 1900-2008:

“While the annualized 0.7% real return for gold over the entire sample period is significantly less than that for stamps, price patterns for gold and stamps are similar.

Stamps are a hedge against expected inflation and perhaps, like gold, a partial hedge against unexpected inflation.

After accounting for holding periods and reasonable trading frictions, stamps may rival equities for the average investor in terms of realized performance.

Stamps generate a nominal (real) annualized return of 7.0% (2.9%) over the entire sample period, worse than equities, better than bonds and comparable to art...”

Should I stay or should I go?

This nugget comes via Morningstar:

"A Strategic Look at the Euro Problem - What If Greece Stayed and Germany Left?
An evaluation of Germany's current options shows that leaving the euro could end up being vastly cheaper for the country than sticking with it."

Indeed it could.

Cui bono?

"Stocks slid on Monday, driving the Dow to its lowest level since February 10 as fresh signs of Europe's banking problems emerged."

Reuters

Gotta love all these "fresh signs". Last week/month/year's signs were not enough?

Apropos the Market Sentiment. CNBC got me all confused:

"Markets to Rise 11-14% by Year-End... 15% Correction Likely... Stocks to Come Back With a Vengeance... Markets Will 'Double This Decline' Into Year-End".

Binary outcomes, again: either up or down. Nobody said flat. Too TV-unworthy?

On the subject of the shiny metal: who is on the selling side of the counter? If gold is such a great buy/bargain, what all these gold coin peddlers doing selling it? Shouldn't they hoard it like crazy? Just hold on to it for a year and sell at a much greater profit, isn't that the case? Oh... they sell to buy to sell again. Are they "flipping"?

Sounds like flipping to me... kind of like "house flipping". With all these efforts, it might as well keep on going up for a while. Real estate was also under-priced/a storage of value/inflation hedge/sure thing/always going up. When Fed accommodates, investors always seem to find a storage of value, don't they?

Disclaimer: I am neither bullish nor bearish on gold.

Something's Gotta Give

"The US and euro zone now stand on the edge of a deflationary precipice… Impending cyclical failure and a deflation scare will trigger new lows in equities as the valuation bear market finally plays itself out with the S&P falling below 500."

Albert Edwards

Are we talking about a 50 percent decline here? When I see a headline like that, I immediately want to find a credible headline that disagrees with it. I am not a “permabear” and I think that standing in front of a huge wave of paper could prove to be somewhat counterproductive, to put it mildly. Besides, what puzzles me is the mostly binary nature of the opinions I hear. Bullish vs bearish. Inflation vs deflation. I reserve the option to assume that the reality may subsist somewhere in the combination of both.

Yes, I know that most new Federal Reserve Notes did not find their way into the broader economy (yet). The velocity of money comes to mind. Fed prints, banks do not lend, boomers buy bonds, and consumers are either unemployed and/or cautious/tapped out. But economies are not hermetic. At some point, assuming a continued and intensive reflationary pressure, paper may start leaking. But how much, how fast, where into? Stagflation, anybody?

Jim Rickards sees 5-7 percent deflation being countered by 5-7 percent inflation. I tend to agree with his assessment. A net effect may be at zero, but this is a very unstable state of affairs.

Got Cash?

"Everybody thinks there is going to be this surplus of dollars due to the government printing, but I don't think that's really the case. I don't think the markets are telling us that. I think the government is printing some money, but the destruction of value is greater than the printing of money and, therefore, the dollar is likely to move into a shortage position and go on a very big rally."

Jeffrey Gundlach

Catch of the day

"Sell in May and go away started a week early this time around. April 26 was very likely the peak of the bear market rally."

David A. Rosenberg

Relative Cookies

"Over the past year, Ben Bernanke has pushed a monstrous sack of Chips Ahoys into the cafeteria. In terms of general price inflation, the question is how eager people are for those Chips Ahoys. If there is a crisis that makes people fear that everything else they might eat will give them food poisoning, the kid's Chips Ahoys will hold their value even if he brings in three times as many. But over time, well after the food poisoning scare is past, those cookies will be worth much less."

John P. Hussman