goldheaven.com

Three signs of deglobalization, plus its bullish impact on Gold Prices…

YOU CAN SEE signs of de-globalization everywhere, writes Martin Hutchinson, contributing editor to Money Morning.

Just look at the intense shareholder opposition to Prudential Plc’s proposed takeover of the Asian operations of American International Group Inc. The market scare on news that North Korea had, indeed, sunk a South Korean Naval vessel was another sign. The "flight to safety" in US Treasuries – sparked by the increasing concern about the future of the Euro and the viability of Greek government finances – is a third.

All over the world, little by little, the apparently inexorable tide of "globalization" – making the world "flat" in the words of Thomas L. Friedman’s best-selling book – is retreating. If a full-scale financial crisis breaks out in the next few months, that retreat will become a rout. And the world will become de-globalized.

De-globalization has happened before. In the 50 years before 1914, the world had become increasingly globalized. That trend included some developments that are hard to imagine today…

• Passports had become unnecessary for most travel;
• Tariffs in some countries – most notably the United States and Kaiser Wilhelm II’s Germany – remained punishingly high. But there was a system of global finance very much like the one we have today;
• That system provided ready capital to the "emerging markets" of that era. And that, for example, transformed Argentina into one of the world’s 10 richest countries.

New barriers against trade and finance were followed by a world war and protectionist policies. Then came the Great Depression. Before any real recovery had occurred, that global downturn caused most countries to raise barriers to imports. The international capital markets disappeared. And the volume of international trade declined by two thirds.

During the quarter century from 1950 to 1975, the world remained largely atomized. One-third of the world’s population lived under political systems that did not allow markets to operate. Even outside the Russia/China bloc, international capital markets were very limited even for debt. And exchange controls in most countries outside the United States prevented all but a sliver of international equity investment.

The forces that would finally cause world-capital and world-trade markets to open got their start in 1979 with the emergence of British Prime Minister Margaret Thatcher (who that year removed British price controls). The election of Ronald W. Reagan as US president shortly thereafter also was key, as was the fall of Communism a decade later.

In the 1990s, most countries were open to world trade, with free-price mechanisms and relatively low tariffs. Public and private equity investments in the "emerging markets" soared in popularity, in spite of the "Asian contagion" and Russian financial crises of 1997-98.

These developments were justified by the formerly socialist intellectuals as a new, moderate "Washington consensus," under which governments retained a role in moderating the forces of the market. The Washington consensus tended to fall apart under stress, as it did in Argentina, because of the excessive government spending to which it led. But it didn’t hinder globalization in the form of free trade and free movement of capital.

With the 2008 financial-system crash, the "Washington consensus" fell apart. The intellectuals had been getting very bored with free markets and had moved on to "global warming" environmentalism. They seized the opportunity to blame free markets for the crash. That change in philosophy allowed protectionist forces in most countries to raise barriers in the form of subsidies and "anti-dumping" actions.

It also gave rise to the "stimulus" – thumping big increases in public spending and budget deficits, all of which were pushed through panicky legislatures. Banking systems were bailed out in a big way. But little was done to address the excessive leverage and ultra-low interest rates that had caused the problem.

We are now seeing the results. Trade barriers, in the form of anti-dumping actions and ecological subsidies, are far higher than they were a few years ago. Government finances are a mess. And investors are becoming more and more nervous about taking on foreign risk. Banks and hedge funds used cheap money to invest aggressively once the initial crisis was past. Now they’re scared again.

There is right now a strong flow of funds into US Treasury bonds. But investors will soon discover that "safe haven" is one of the world’s more dangerous investments.

If the panic over government debt leads to another financial crisis like that of 2008, further bailouts of the financial system are inevitable. And if that happens, be assured that we will move even closer to de-globalization.

Further trade barriers will appear, reducing the interchange between economies that is a major engine of world efficiency. But that’s only part of the damage. Even worse will be the huge decline in international investing activity. Governments will either limit such investor activity, or investors will be unwilling to do so due to the perceived risk.

Investment will be largely domestic, but the United States will have lost much of its cheap capital advantage over other countries because of its persistent balance-of-payments shortfalls and budget deficits.

In that case, many of the economic advances that globalization has brought to the United States – and the world as a whole – will be reversed. The world economy will have to adapt to a much lower level of efficiency, with higher manufacturing costs and less outsourcing. Both inflation and unemployment will be high. The result: We’ll be looking at a decade of inflationary recession, with declining living standards.

We have already traveled a considerable distance toward de-globalization and should work towards reversing this trend. We should keep trade barriers down and international capital markets open. As protection against the possibility that governments and markets will fail in this attempt, investors should look in one direction – at Gold.

In a world of inflationary recession, in which international investment opportunities are blocked and government bonds are dangerous, gold remains the most reliable store of value. Others will realize this. So people with investment gold in their portfolios will at least have the satisfaction of increasing their capital, while others are losing theirs.

Looking to make a Gold Investment today…

Source:Why De-Globalization is Bullish for Gold

Measured against the Gold Price, the US stock-market’s huge 62% rally is less than stellar…

MARCH 9th 2010 marked the one-year anniversary of the elusive bottom of the most brutal bear market in global stock markets since the 1930s, notes Gary Dorsch at Global Money Trends.

At the time, US job losses were running in excess of 700,000 per month, and fear was rife that the US banking system was on the verge of being nationalized. American factories and miners were using 68% of industrial capacity, the lowest level since records began in 1948. Corporate profits fell sharply for the seventh consecutive quarter, the longest losing streak since the 1930s. The second coming of the "Great Depression" looked imminent.

In a final act of desperation to stop the carnage, the infamous "Plunge Protection Team" – the nickname given in the 1980s to the President’s Working Group on financial markets – unleashed the most powerful weapons in its arsenal, resorting to accounting gimmickry and nuclear Quantitative Easing.

Injecting $1.75 trillion into the coffers of the Wall Street oligarchs, the PPT sought to turn the bearish tide. Bankers were set free of mark-to-market accounting, and instead, were allowed to value their toxic assets at "mark-to-make-believe" prices, leading to a strong recovery in the financial sector.

Over the course of the next four-weeks, the Dow Jones Industrials climbed 1,500 points to close at 8,083 on April 9th, 2009. Still, there was great skepticism about the sustainability of the so-called "green-shoots" rally, the third such rally since the horrific crash of Sept-October 2008 that followed the default of Lehman Brothers and the bailout of American International Group (AIG).

Before hitting the ultimate bottom at 6,500, previous Dow rallies ended as "bear traps" that fizzled out before the market turned sharply lower again. There was a 1,500-point run-up during the week that culminated in the election of Barack Obama as US president, after which the Dow lost 2,000 points over the next three weeks.

The Dow Industrials staged another 1,500-point gain in December, triggered by Obama’s selection of Wall Street favorite Timothy Geithner as Treasury chief, before plunging 2,500 points during the first two months of 2009.

Since the Dow Industrials hit rock-bottom on 9 March 2009, US stocks have staged a $5.3 trillion recovery, one of the very biggest percentage gains since the Great Depression.

When viewed through the prism of Gold Bullion, however – and thus measured in "hard money" terms – one can see that the performance of the Dow Jones Industrials was less than stellar. The blue-chip indicator has been locked within a narrow trading band for the past 11 months, fluctuating on both sides of 9.5 ounces of gold since April 2009. (Learn more about the Dow/Gold Ratio here…)

The "green shoots" rally is, therefore, an optical illusion, simply reflecting the side-effects of the Fed’s hallucinogenic "quantitative easing" drug. Utilizing the chart above, one could argue that the value of the Dow Industrials is artificially inflated by about 2,500 points, engineered by the Fed’s monetization scheme and ultra-low interest rates. An ocean of liquidity is buoying the Dow Industrials above the 10,000-level, designed by the PPT to bolster household confidence, since the valuations of 401k retirement funds and investor portfolios can influence the propensity to spend.

Still, there are huge worries about unrelenting job losses, multi-trillion Dollar budget deficits for years to come, and the "Volcker rule", which could put the shackles on the Wall Street oligarchs, and force the liquidation of widely held stocks and commodities. But for now, the market’s climb above the 10,000-level means the possibility of a "double-dip" recession is more remote, and instead, trying to short-sell stock indexes, is like trying to push a helium balloon under water.

The broader-based S&P 500 Index of US stocks has rocketed 62% higher over the past year, a gain that would normally take five years to realize on modern trends.

The speed and strength of the stock market’s recovery caught many bond traders off-guard, and knocked US Treasuries for their worst annual losses since 1978. Most notably, the yield curve – the gap between short-term interest rates and longer-term government bond yields – rose to its widest level ever. The spread between yields on the Treasury’s 30-year bond compared to the one-year T-bill rate hit 440-basis points in December, the widest in history.

Traders reckon that the size of the US national debt – now exceeding $12.3 trillion – is weighing on bond prices, and a huge avalanche of debt still lies ahead. The Treasury is expected to issue $1.6 trillion in new debt in 2010, and $1.3 trillion the following year. Chinese central banker Zhu Min has warned it would become more difficult for foreigners to buy Treasuries when the US government has to fund its deficit by printing more Dollars. China slashed its holdings of Treasury securities by $34.2 billion in December, after months of complaining about the Fed’s Quantitative Easing scheme.

The extreme widening of the yield curve also reflects expectations that in the next phase of the Fed’s interest rate cycle, the central bank would be lifting short-term interest rates to contain an outbreak of inflation.

"When you have zero rates that go on indefinitely, you are inviting future problems," warned Kansas City Fed chief Hoenig on March 2nd. "Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation," Honeig said on Jan 7th.

However, the Fed is sending multiple messages to the media, that it’s determined to hold the fed funds rate steady at 0.25% through the remainder of this year. "Even though the recession appears to be over, it does not mean that we are where we want to be. Even with my moderate growth forecast, the economy will be operating well below its potential for several years," said San Francisco Fed chief Janet Yellen on Feb 22nd.

"If it were positive to take interest rates into negative territory I would be voting for that," she told reporters.

The Obama administration hailed the latest employment report, which showed a smaller-than expected loss of 36,000 jobs – and the 25th monthly decline in net jobs in the last 26 months – as a vindication of its economic policies.

For its part, the Dow Jones Industrials roared above the 10,500 level, buoyed by the "exploitation of labor" that is still widening company profits. So far then, the recovery in the economy has been limited to Wall Street’s oligarchs and S&P multi-nationals, which are profiting from trillions in taxpayer bailouts, virtually unlimited and cheap credit, exports to growing emerging markets, and the use of mass unemployment to slash the wages of Americans working in the service sector, which accounts for 85% of the US economy.

Meanwhile, top Wall Street firms paid their employees a record $145 billion in compensation last year, while social programs for the elderly, such as Medicaid and Medicare are being slashed, and millions of other jobs wiped out. The banking oligarchs, whose greed and speculation caused the crisis, refuse to expand lending to the private sector, but instead utilize zero-percent funds at their disposal to gamble in the markets, and all with the backing of government-financed guarantees.

Stock market rallies often climb along a "wall of worry". Yet despite persistent fears of a relapse into a "double-dip" recession, the most amazing aspect of the "Green Shoots" rally is the upward parabolic trajectory, was punctuated by only two brief corrections that barely caused a dent in the year-long bull market. The first correction in June 2009 was triggered by a sharp rise in 10-year Treasury yields to as high as the psychological 4-percent level. Yields have subsequently tumbled to 3.70%, far out of danger’s way, as far as market bulls are concerned.

The second correction, in January 2010, was triggered by China’s surprising hike in bank reserve ratios, plus Obama’s backing for the "Volcker rule" – banning risky trading by Wall Street Oligarchs – and a surge in crude oil prices above $80 per barrel.

However, Plunge Protection officials quickly put a safety net under the stock market, by promising to leave the Fed’s $2.2 trillion balance sheet untouched, and to maintain zero-percent borrowing costs for the biggest banks, for the rest of the year.

Thus, the Wall Street Oligarchs were able to return to the gambling table and re-engage in the most hazardous and riskiest forms of speculation. However, one of the consequences of the Fed’s ultra-easy money policies is a surge in crude oil prices above $80 per barrel, further reducing the purchasing power of Americans’ shrinking wages. And now that oil prices have latched onto the stock market’s joy ride, any attempt by the PPT to catapult the S&P Index rally above the January highs runs the risk of jettisoning crude oil into the $85-to-$90 region.

On March 10th, Saudi Arabia’s deputy oil minister, Prince Abdulaziz bin Salman, told reporters that a oil price of around $70-to-$80 per barrel was a satisfactory price for energy companies to invest in oil production capacity, and low enough for consumers that burn the fuel. Saudi Arabia, the Opec oil cartel’s largest producer, has shouldered most of the 4.2 million barrels-per-day of supply cuts adopted in late-2008. However, compliance to Opec’s output quotas, outside of the Saudis, Kuwait and the UAE, has fallen to 53%, which means the cartel is cheating by 2 million bpd.

"Energy demand is likely to continue to grow, led by rising consumption in Asia and the Middle East," bin Salman said, and the US Energy Information Agency predicts it could grow by 1.5 million bpd this year.

China, the world’s second largest oil guzzler, meantime imported 4.8 million bpd in February, the second highest tally on record. If oil prices surge to $90 per barrel – with "carry trade" speculators bidding-up prices using zero-per-cent loans from the US central bank – Riyadh could quietly increase its oil output without much fanfare to cool the market, or China’s central bank might be forced into tightening its monetary policy again.

Surging oil prices could thus ignite an "Oil Shock" for the global economy, and the Plunge Protection Team would be forced into action again, intervening in the stock index futures markets in order to limit the fallout. The PPT could also instruct the Fed to buy more T-bonds, so as to prevent yields from rising higher due to inflationary pressures emerging in the commodities markets.

And at that point, "hot-money" flows could once again pour into the precious metals markets, sending Gold Prices to record heights.

China’s manufacturing exports are growing again, up 45% from a year ago, and "hot-money" inflows are rising, adding to the pool of cash sloshing about the Chinese economy.

China’s stash of foreign exchange reserves has mushroomed to $2.4 trillion. And at the same time, in order to keep the Yuan tightly pegged to the US Dollar, the People’s Bank is buying vast quantities of US Dollars, Euros and Yen for its FX reserves, simultaneously printing equal amounts of Chinese Yuan to buy those currencies off local export companies, thus blowing bubbles in the Shanghai commodities pits and buoying the gold market.

Beijing is nurturing fertile ground for the Shanghai gold market, which has already risen 54% against the Yuan since the central bank opened the money spigots in November 2008. Gold demand in China grew by 14% to around 450 tonnes in 2009, outstripping 315 tonnes of supply. Speculation is rife that Beijing is Buying Gold from state-owned miners to avoid sending the international open-market price sharply higher.

Beijing has several "ideas and tool kits to manage inflationary expectations," warned Liu Mingkang, chief of the China Banking Regulatory Commission, on March 9th.

"Don’t get into too much of a panic or be afraid about inflation. China’s consumer and producer price index may rise slightly, but there’s only a small chance that inflation will be more than moderate," he said.

China’s consumer inflation rate surged to 2.7% in February, and factory-gate inflation surged to 5.4% last month. Thus, China’s inflation rate now exceeds the 2.25% interest rate on 12-month certificates of deposit, encouraging savers to withdraw their cash from banks and Buy Gold bars.

With food and energy accounting for half of China’s consumer price basket, soaring commodity prices are a ticking time bomb for social unrest. Yet Beijing is loath to further tighten its monetary policy, for fear of undermining the Shanghai stock market…

How best to Buy Gold today? Make it simple, secure and cost-effective by using BullionVault…

Source:Gold & the Dow's "Optical Illusion"

Calling all capitalists! We need a new form of corporate governance…

TO INATTENTIVE observers, the recent announcement that the British insurance company Prudential Plc will pay $35.5 billion for American International Group Inc.’s Asian insurance operation, AIA, might seem like just another belated expansion of the old British Empire, writes Martin Hutchinson in Money Morning.

Indeed, it might seem to offer a strange contrast to the sale of the premier British chocolate company Cadbury to Kraft Foods Inc. last month.

Yet in reality both deals are examples of Empire-building that for shareholders is much more dangerous than the benign British variety. This is Empire-building by corporate management that runs contrary to capitalist ideals.

The British Prudential was founded in 1848, beating its US counterpart by 27 years. It was a very similar company in its business, providing insurance policies to working people.

When I was a child, the man from the Pru used to call weekly on my grandmother to collect her two shillings and six pennies premium (about 50 cents) on a whole life policy. I used to deal with Prudential in my early days in the City of London; when visiting them you could always rely on a good cup of tea around 3:30 in the afternoon as the lady with the trolley made her way round the office doling out biscuits and gossip.

(That early period in my career was the only time I was any good at office politics. Mary the tea lady at Hill Samuel, where I worked, would provide me with a cuppa just after she’d been to the boss’s office, and mutter to me what reorganizations were being planned!)

Needless to say, the Pru has changed since the 1970s – but not necessarily for the better. The new chief executive officer, Tidjane Thiam, is a management consultant from the Ivory Coast, with no particular ties to Britain and few to the insurance business. He had spent a few years as "Strategy Director" of another insurance company after being headhunted from McKinsey & Co. Needless to say, Thiam wanted to make a splash, and not leave the venerable British company looking the same as when he found it.

At first sight, buying a huge Asian operation looks strategically sensible. It makes Prudential a major player in the Asian market and a substantial one in (gasp!) China. There are also rumors that in order to buy it, Prudential may divest itself of its UK operations, thereby losing a low growth business and moving into a high growth business.

All very consultantish and clever. That is until you look at the question of price.

Prudential is paying $35 billion for AIA, which is $15 billion more than the $20 billion AIA was thought to be worth as a stand-alone business. To buy it, Prudential is going to issue shares to AIG, as well as undertaking a $20 billion share issue that will double its capital and dilute the hell out of existing shareholders.

And, of course, if Prudential sells its British business it won’t get much for it. After all, British insurance is a "low growth" business, so it won’t be worth very much in a sale. In other words, it’s just about as bad a deal as possible for existing Prudential shareholders.

Rather than follow the classic axiom of "buy low and sell high," Thiam is buying high and selling low. And that’s not all.

In spite of its new whizz-bang CEO, Prudential is a slow-moving but very reliable organization with a level of integrity that is trusted by policyholders. Frankly, that’s what you want in an insurance company. I have had a modest UK pension with one of its competitors since 1980, and I am constantly worried that some leveraged buyout (LBO) artist will step in, take it over, change the computer system so that information gets lost, outsource customer service, and drive the company into bankruptcy.

If you’re buying life insurance or pension services, you want a company that’s not going to disappear in the next 30 years, and doesn’t change its address or computer system too often.

Avoid a company like the plague if it is run by whizz kids. That’s what AIG was like. We know how AIG operated; the guy who ran it thought betting the ranch on the credit default swap market was a good idea. Its Asian operation is no doubt full of similarly clever ideas. Even in the unlikely event that everything there is on the level, the cultural clash with an old-fashioned British insurance company is huge.

And why would you pay a PREMIUM for an AIG operation? Like the Kraft/Cadbury deal, Prudential’s takeover of AIA is value-destroying. Also like Kraft/Cadbury, it looks likely to destroy a valuable part of the British economy that millions of people have relied upon for generations – only this time the destruction will be caused by the buyer rather than the target.

As shareholders we need a new form of corporate governance. Those in management are hired hands. In the old days, large shareholders used to treat management as they would have treated their butler – and management was equally deferential to the owners of substantial percentages of the company’s capital. That’s how capitalism is supposed to work – with resources deployed in the interests of the owners of capital.

We know that system works; economics shows us why it works. The alternative, with resources deployed to satisfy the egos and fill the pockets of the hired hands, has no theoretical justification and little practicality – just as a big country house run in the interests of the butler would be a mess.

As capitalists, we must work together to restore capitalism.

Making a Gold Investment today? Cut out the middleman and slash your costs…but without compromising security…by using BullionVault…

Source:The Man from the Pru