A weak dollar explains the rising price of gold?

Inquiring minds are reading the Economist article Bullion bulls:

Gold was once the linchpin of the global monetary system and is still seen by many as a hedge against inflation. But if investors are really frightened of price rises, it is hard to see evidence in the government bond market. There has been a modest increase in inflation expectations (measured by the difference between the yield on inflation-linked bonds from that on conventional bonds). But the Treasury bond market is only pointing to average inflation of 1.9% over the next 20 years.

Conventional explanations of supply and demand do not work, either. Mining production is slightly up year on year; jewellery demand is down by 13.8%. The main demand has been led by investment. Retail and institutional investors have been buying gold through exchange-traded funds, which allow them to have a pooled stake in bullion.

But blaming the rise on ETF purchases does not answer the fundamental question; why do investors want exposure to gold at all? The dollar is the prime suspect. Gold’s rise coincided with a fall in the greenback on a report (since denied) that oil-producing countries were talking about replacing the dollar as the pricing currency. When the dollar falls, as it has since March, risk-averse investors tend to buy gold.

David Malpass's view on the U.S. dollar

Inquiring minds are reading the WSJ article The Weak-Dollar Threat to Prosperity:

If you want to know why the dollar has been falling this week and gold hit a new high, look no further than the weak jobs numbers last Friday and the weak communique issued over the weekend at the G-7 meeting in Istanbul.

Asked whether low interest rates will weaken the dollar, Bill Gross said: "I think that's part of the administration's plan. It's obviously not announced—the 'strong dollar' is always the policy, so to speak. One of the ways a country gets out from under its debt burden is to devalue."

Corporations play this game for bigger stakes, borrowing billions in dollars to expand their foreign businesses. As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad. Though British equities rose in pound terms, they generally underperformed gold and foreign equities.

Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create.

The more the dollar devalued against the yen in the 1970s and '80s, the more Japan gained share in valued-added manufacturing, using the capital from weak-currency countries to increase productivity.

The value is migrating from firms that run networks and make hardware to those that make software and offer services

Inquiring minds are reading the Economist's Cleverly simple and Copycats:

Sales of smart-phones were up by nearly 15% in the 2Q of 2009, according to IDC, a market-research firm. The market for smart-phones is expected to grow so quickly in part because they are changing. Expensive pocket computers such as the iPhone and BlackBerry are giving way to new models that come with popular services built in, but are less versatile or run on open-source operating systems, and are often cheaper. All this reflects a broader trend in the industry, where value is migrating from firms that run networks and make hardware to those that make software and offer services.

New handsets from Motorola, an industry veteran, and INQ, a rising star, illustrate these changes. They both feature built-in support for online services, including popular social-networking sites such as Facebook and Twitter.

INQ and Motorola are also both betting on Android, an open-source operating system developed by Google. Although the internet giant’s operating system only has a small piece of the market, it is clearly gaining momentum.

Android will also accelerate the third trend. Prices are now on a downward spiral, says Ben Wood of CCS Insight, a research firm. Several other handset-makers are already offering cheap smart-phone-like devices. Android allows cut-price Chinese firms such as Huawei and ZTE to enter the smart-phone market, which they had previously stayed out of for lack of the necessary software.

But if pared-down smart-phones become the norm, handset-makers risk becoming sellers of commodity hardware while operators face a future as dumb pipes for data. Hence the recent rush into services.

Xerox’s move follows Dell’s recent $3.9 billion offer for Perot Systems, another services company. Both bidders are betting that profits from their targets, which boast fat margins and multi-year contracts with customers, will offset shrinking returns from the increasingly commoditised hardware business. They hope the deals will help them sell more photocopiers, computers and other gear too. The combined firms will compete with behemoths such as IBM, which now gets more than half of its revenues from services, as well as Indian rivals such as Infosys and Wipro.

Splicing hardware and services firms together can pay off handsomely. Witness the experience of HP, which last year forked out $13.9 billion for EDS, a services giant. (On September 23rd HP renamed the business HP Enterprise Services.) After a difficult integration process involving thousands of job losses, HP’s operating margin in services has hit a ten-year high of 15.2% and it now has deals involving $4 billion-worth of HP equipment in the pipeline. Before the acquisition, EDS mainly touted kit from HP’s rivals. Dell and Xerox must be hoping that this success can be copied.

Some great daily market analysis

From Zero Hedge - Wall Street "Animal Spirits" Stampede Across the River

Anyone see 60 Minutes last night? The story about the animal migration across the Mara River in Kenya? All the Wall Street particpants were there. And this morning they were stampeding back into the "inflation" and "re-risking" trade once again.

Despite the warnings from Nouriel Roubini, despite the crash warnings from the survivalists who have suddenly become expert market technicians, etc., the market was ramped up on a Goldman Sachs upgrade of a few bank stocks, and that was enough to get the "Animal Spirits" going.

Here's a picture of the Wall Street Herd crossing the river called the 50-day EMA:

And here are some of the participants:

Fidelity, Vanguard, Schwab, Barclay's, etc.

TIAA-CREF, Harvard Endowment, Gates Foundation, CalPERS, etc.

Myriad Hedge Funds, Bucket Shop Players, etc.

Various 19-year old enterprising speculators, daytraders, action junkies, etc.

Goldman Sachs Prop Desk Traders lying in wait:

As soon as it was evident that the oft-predicted October Crash was not going to happen just yet, and the 50-day was not going to be broken today, the herd immediately jumped in and wildly bought stocks....

Meanwhile, here's a hapless retail daytrader who was caught on the wrong side of the river, overmargined with a short position, being devoured by a Goldman Sachs Prop Trader:

Just another day in the jungle, buying the worst stocks possible.

Like Select Comfort Mattress:

Las Vegas Sands:

Nordstrom's

Robert Reich thinks government debt is not an issue, creating jobs is more important

From Robert Reich's blog:

Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.

Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.

When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn’t even know what a debt was, but it kept me up at night.

My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.

You see? The most important thing right now is getting the jobs back, and getting the economy growing again.

People who now obsess about government debt have it backwards. The problem isn’t the debt. The problem is just the opposite. It’s that at a time like this, when consumers and businesses and exports can’t do it, government has to spend more to get Americans back to work and recharge the economy. Then – after people are working and the economy is growing – we can pay down that debt.

But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.

h/t Zero Hedge

Some companies are investing their way out of recession

Inquiring minds are reading the Economist's Thriving on adversity:

Bain & Company discovered that twice as many firms made the leap from “laggards” to “leaders” (ie, from the bottom quartile of companies in their industry to the top quartile) during the recession of 1991-92 than during non-recessionary times. McKinsey discovered that one-third of banks and two-fifths of big American industrial companies dropped out of the first quartile of their industries in the recession of 2001-02.

What about the current recession? The most obvious winners are established giants: market leaders that entered the recession with cash in their pockets and sound management systems under their belts. These companies are reaping rewards from investors who are skittish about shakier rivals. They are also using their corporate muscle to squeeze their costs (for example, by negotiating cheap rates for advertising) and so win market share from their competitors. BCG, another consultancy, notes that 58% of companies that were among the top three in their industry had rising profits in 2008 and only 30% saw their profits decline. In contrast, only 21% of companies outside the top three had rising profits, and 61% had falling profits.

McDonald’s is simultaneously sharpening its appeal to its core customers, even introducing computer systems that allow its outlets to adjust their prices to local economic circumstances, and moving upmarket with lattes and salads. Asda, a British supermarket chain, is building 14 new stores and hiring 7,000 new workers. PepsiCo has taken direct control of two of its biggest bottling companies, at a cost of $6 billion.

Despite seeing its revenues fall by 23% in the last quarter of 2008 compared with the last quarter of 2007, Intel is continuing to invest heavily in innovation. Craig Barrett, the company’s former boss, insists, “You can’t save your way out of a recession; you have to invest your way out.” P&G is launching its biggest expansion in its 170 years, opening 19 new factories around the world and investing heavily in new ideas, despite disappointing recent results. IBM is holding a series of “innovation jams” designed to squeeze ideas out of its employees.

Cisco is speeding up its transformation from a backroom network plumber into a much more versatile internet giant, using its cash reserves to snap up start-ups in new fields and expand its business portfolio. Repositioning is a strategy that has paid off dramatically in the past. When the Soviet Union collapsed, plunging Finland into economic turmoil, Nokia’s response was to abandon 90% of its businesses to concentrate on telecoms, particularly mobile phones.

Russia's sickly car market and some "smart" predictions

Inquiring minds are reading The Economist's Russia's sickly car market:

A year ago Russia’s market for new cars was one of the fastest growing in the world. It had gone from annual sales of less than 1.5m in 2005 to nearly 3m and was poised to overtake Germany as the fourth-biggest car market in the world. Ernst & Young, a consultancy, forecast sales of 5m by 2012. Credit Suisse confidently predicted that sales would grow by at least 12% a year until 2012 and that by then the foreign car firms that had rushed to build factories in Russia would be producing more than 1.5m cars a year. How wrong they were.

There is no mystery about why Russia’s car market is reeling. Credit, which was used to finance the purchase of about half of all new cars, disappeared almost instantly because Russian banks were unusually dependent on shuttered wholesale markets. Thanks to the economy’s reliance on exports of oil and gas, slumping energy prices immediately hit both earnings and the rouble. The tumbling rouble also meant that foreign car brands suddenly became much less affordable, including those made in Russia, because most of their components are still imported. “We had to force through several price increases in a weakening market,” says Nigel Brackenbury, Ford’s senior executive in Russia.

“The market will come back—the wealth has not disappeared,” says Christian Estève, who runs Renault’s operations in Russia. Pointing to car-ownership levels that are still less than a third of Western Europe’s and the age of the Russian fleet, Mr Brackenbury agrees: “We still believe the market will eventually get back to 3m-4m a year.” However, neither expects a rapid bounce.

Mr Putin wants both AvtoVAZ and Gaz to survive, so they probably will. But although Russia’s car market will eventually recover, the same cannot confidently be said of its native carmakers.

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Economic outlook from Paolo Pellegrini

From Bloomberg's Pellegrini 80% Return Proves Paulson Protege No Fluke at Fund:

Today, Pellegrini’s economic outlook for the next 5 to 10 years is a sobering one. He says the U.S. economy will groan under the weight of budget deficits, increased regulation and household debt. Europe will perform only slightly better, and Asian economic growth will outstrip that of the developed world. “There are going to be huge shifts in wealth around the globe,” he says. “I want to invest in that.”

Pellegrini says the U.S. stock market is likely to generate negative returns when adjusted for inflation. And the U.S. dollar will flag as an unrestrained Federal Reserve dispenses more money.

“In the U.S., there is limited interest among those in power in the stability of the dollar,” he says.

Meanwhile, the price of scarce commodities such as oil will surge as global competition for them heats up, Pellegrini says. Accordingly, he expects U.S. Treasuries to fall in price in the long term, and he’s buying oil futures. In September, he owned Norwegian kroner and said he believed the Australian dollar would benefit from that resource-rich country’s geographic proximity to Asia.

From Zero Hedge - John Paulson's ABX Oracle Paolo Pellegrini Discusses Anemic Real Stock Returns, Blasts Federal Reserve:

• Stay away from US fixed income asset: he is short USTs and Agencies
• Much more demand for commodities, specifically oil: "these are the real assets you want to be in"
• US Equities: "trend growth will be much less than in the past and that affects equity valuations" - there will be less efficiency, less activity, less real growth, which will affect stock valuation. "You will have anemic real returns on stocks."
• What should the Fed be doing? "We should focus on market based way of reducing household liabilities, basically restructure mortgages one by one and whoever made the mortgages should bear the brunt of the losses"
  
• "Long-term let's change the mission of the Federal Reserve: let's codify something that prevents it from running amok, like it did for the past ten years"

h/t Zero Hedge

Success story: Paolo Pellegrini of PSQR - John Paulson's protege and ABX oracle

Inquiring minds are reading Bloomberg's article Pellegrini 80% Return Proves Paulson Protege No Fluke at Fund:

Paolo Pellegrini has a nose for trouble. He saw it in rising housing prices in early 2006, when he cranked through decades of home price data and concluded the bubble was poised to burst. Pellegrini then helped engineer a massive bet against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent -- and firmwide profits of more than $3.5 billion.

Pellegrini says his fund’s name, PSQR, is a play on his own: Paolo or Pellegrini Squared. It’s also an anagram of SPQR, the initials of the ancient Roman Republic that stand for Senatus Populusque Romanus, or the Senate and the People of Rome. The four letters are still emblazoned on monuments and signs around the city, where Pellegrini was born and spent his first five years amid the cobblestoned alleys of the Trastevere district.

The identity of the Zero Hedge founder has been revealed

Inquiring mind are reading The Dow Zero Insurgency:

As it happens, the founder is a 30-year-old Bulgarian immigrant banned from working in the brokerage business for insider trading. A former hedge-fund analyst, he’s also a zealous believer in a sweeping conspiracy that casts the alumni of Goldman Sachs as a powerful cabal at the helm of U.S. policy, with the Treasury and the Federal Reserve colluding to preserve the status quo. His antidote? A purifying market crash that leads to the elimination of the big banks altogether and the reinstatement of genuine free-market capitalism.

h/t Zero Hedge