January 12, 2017: CAMRADATA, a leading provider of data and analysis for institutional investors, has collated the top 10 global investment trends for 2017 from a range of its asset management clients.

Sean Thompson, Managing Director, CAMRADATA says, “Our asset management clients have predicted that 2017 will be an extremely interesting year for investors. We are in a midst of a sea change in the global environment that will create both opportunities and risks.”

The top investment trends for 2017 from asset management firms:

A year of volatility in global markets

The political uncertainty in both the USA and Europe following the election of Donald Trump, Brexit negotiations and the forthcoming French and German elections are all going to have a big influence on the markets and continued volatility.

According to Mark Burgess, Chief Investment Officer EMEA and Global Head of Equities at Columbia Threadneedle Investments, “2017 will be a year of volatility as markets make sense of the promises and policies that politicians have promoted, and that volatility in markets provides the perfect opportunity for active management.”

Steven Bell, Chief Economist at BMO Global Asset Management EMEA, believes that Trump’s victory will be the ‘key driver of change’ and that the global economy is starting to heal. “A number of key indicators suggest that the world’s economy has been healing for some time. Monetary policy has played an effective role in this healing process but seems to have reached its limits with negative rates having disappointing effects in Europe and Japan. The baton should be passed to the fiscal authorities and Trump looks set to run ahead with it. Whether other countries will follow suit remains to be seen.”

Interest rate rises and falls

Most companies are predicting interest rate rises in the USA, but a fall in emerging markets.

Ricardo Adrogué, Head of Emerging Markets Debt at Barings, says, “Over the next year, global interest rates will likely move in different directions. As the US economy continues to gain steam, rates will likely increase while Europe and Japan appear on track to continue their accommodative policies. On the whole, EM local interest rates continue to fall as inflation remains healthy and growth remains tepid.”

Global inflation on the rise

Ricardo Adrogué, Head of Emerging Markets Debt at Barings, says, “Global inflation may rise but will likely remain relatively subdued over the next several years. Due to the lower inflationary pressures, we expect to see lower overall interest rates for EM local bonds where nominal yields offer significant compensation for risk.”

Bonds poised for solid performance

Robert Tipp, Managing Director, Chief Investment Strategist and Head of Global Bonds at PGIM Fixed Income, says, “Between the Brexit vote and the Trump sweep, 2016 was a year of surprises and bumps, but it was a generally productive year for the bond market. And, when we look at 2017, our best guess is that the opportunity in the bond market will once again outweigh the risks and that bonds are poised for solid performance.”

Embracing credit risk

Jan Straatman, Global CIO at Lombard Odier Investment Managers (LOIM), and Salman Ahmed, Chief Investment Strategist at LOIM, point out that in the world of largely low or negative rates, investors should consider increasing their exposure to credit risk through an allocation to corporate credit in 2017.

However, they say investors need to look beyond the higher-rated, investment-grade segment of this market where duration risk is a dominant force.

They comment: “We believe that to increase yield sufficiently, investors should move further down the credit spectrum. In our view, the so-called ‘crossover’ universe, which spans the lower quality investment-grade (BBB) and higher-quality high-yield (BB) rated issuers, provides significant return enhancement relative to investment-grade issuers while not exposing investors to the excessive default risk that is a feature of high-yield debt (rated B and below).”

Growth of global equities

The move into equities is another key trend.

Mark Burgess, CIO EMEA and Global Head of Equities of Columbia Threadneedle Investments, says, “Compared to their longer-term history, equities still offer better value than bonds – though this might change, should the ‘bond bubble’ burst in 2017.”

Steven Bell, Chief Economist at BMO Global Asset Management EMEA, says, “Higher US rates and a strong US dollar will see markets struggle to make much headway and although equities are our favoured asset class, stronger economic data could see bonds rally and shares fall at some point. In terms of sectors, recent trends look set to continue with cyclically orientated areas outperforming and bond proxies struggling. The prospects for emerging markets remain difficult as dollar strength and rising rates outweigh the benefits of better growth. But 2017 might be the year in which European equities finally outperform, ending half a decade of disappointment.”

Impact of technology

Technology will also have a significant impact in 2017.

According to Richard Turnill, Global Chief Investment Strategist at BlackRock Investment Institute, “Technological change is sweeping through industries, overhauling business models, reducing traditional jobs and limiting inflation. The rapid pace of technological change is causing disruption across industries and displacing jobs − and is arguably fuelling populist politics.”

Advances in artificial intelligence could have an even bigger impact on better-paying white-collar jobs in services industries such as finance. And fossil fuel companies risk being upended by renewables once energy-storage technologies improve.

Tony Kim, Portfolio Manager at BlackRock’s Global Opportunities Group says, “Artificial intelligence (AI) is the new electricity. The big bang is upon us. We have all this data, but we can’t do anything with it. AI is the solution.”

Opportunities for active investors to increase

Mark Burgess, CIO EMEA and Global Head of Equities at Columbia Threadneedle Investments, predicts that 2017 will be an active time for investors, and expects opportunities for discerning investors to increase. “Amid rising political uncertainty, fundamental analysis and expert asset allocation will be critical in order to achieve long term returns. The tide of global QE that had previously lifted all boats will begin to ebb in some regions and flow in others, and in that environment it will make sense to differentiate within and across asset classes.”

Challenges in Asia and Emerging Markets

Burgess predicts challenges for Asia and the Emerging Markets (EMs) that are exposed to the threat that Trump poses with protectionist policies. These include China, Mexico, Colombia, Malaysia, Korea and Thailand.

BlackRock Investment Institute also highlights China and the worries around China’s capital outflows and falling yuan. However, they also say China’s stabilising growth has eased some of the anxiety that rattled investors in early 2016. Nevertheless, there are still challenges ahead as ‘China is attempting a difficult balancing act: prioritising near-term economic growth while tackling debt issues for the longer-term good’.

Emiel van den Heiligenberg, Head of Asset Allocation at Legal & General Investment Management (LGIM), points out one of the key risks for 2017 is a significantly weaker Chinese currency driven by capital leaving the country. “Our base case is that the Chinese will manage a 5% real currency fall at the cost of lower foreign currency reserves and tighter capital controls, particularly given the Communist Party’s power transition in late 2017. We do not expect a sharp slowdown in growth. However, the risk of a faster devaluation is not immaterial and, as we saw in 2016, that would likely lead to weaker global equity markets.”

Major challenges in Europe

John Greenwood, Chief Economist at Invesco Ltd, predicts the challenges in Europe will lead to poor economic growth. The slow progress of bank resolution, the weakness of the European Central Bank’s (ECB) QE programme and the consequent descent into negative interest rates are among the headwinds holding back economic recovery.

He also highlights double-digit unemployment levels, leading to disruptive populist and xenophobic political movements, and referenda or elections in Italy, Holland, France and Germany. “At some stage, one or more of these electorates could overwhelm the governing elites, posing an existential threat to the established order – the European Union (EU) or even the Eurozone. Real GDP growth is likely to remain around 1.5% at best, with inflation falling far short of the ECB’s target of ‘close to but below 2%’.”

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The governor also told members of the Treasury Select Committee that a period of transition was ‘highly advisable’. “If such a transition is not put in place, in our view it will have consequences. We will work to mitigate those consequences as much as possible,” he said.

Carney said the UK should concentrate on stable access to financial markets after Brexit.

Last week, the Bank of England’s chief economist, Andrew Haldane, admitted that some criticism of economic forecasts about the immediate impact of a Brexit vote were justified.

Carney told the committee that economic forecasting had improved since the financial crisis, by being more pessimistic. “As you’d expect a bunch of dour central bankers to be, we’re focused on the downside and less focused on how everything could turn out well, but what could go really wrong… and where can we potentially mitigate that. We do have to ask ourselves continually what could go wrong. We don’t have to see a ghost behind every corner, but we do have to ask ourselves what could go wrong.”

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Since the election, financial markets and surveys of business and consumer confidence have showed growing optimism about short-term growth prospects of the US economy. But it’s too early to see this optimism in December’s job growth number, which reflects a continuation of a moderate employment growth trend, according to Gad Levanon, Chief Economist, North America, The Conference Board.

As expected, the unemployment rate increased slightly in December following a large drop in November. But in a solid job growth environment, the unemployment rate is clearly trending down.

Over the past 12 months, average hourly earnings grew by 2.9 percent, a new record for this expansion. With the labour market tightening faster than pre-election expectations, wages and prices may accelerate, leading the Fed to raise interest rates faster than the market currently expects.

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The bank has come under intense criticism for predicting a dramatic slowdown in the UK’s fortunes in the event of a vote for Brexit only for the economy to bounce back strongly and remain one of the best performing in the developed world.

Haldane admitted that the bank did not anticipate resilience of consumer spending after Brexit. However, he added that the bank has been wrong about the timing and not about the fundamentals.

“This is more a question, I think, of timing than of a fundamental reassessment of the fortunes of the economy. So back in November, we published a forecast for inflation, which was the highest we’ve ever published. And the forecast for growth in the UK economy, that was the lowest we have ever published. We are still expecting this rather difficult balancing act for monetary policy with a slowing, not a huge slowing, but nonetheless a material slowing, during the course of next year as the effects of higher prices in the shops begin to chew away a little at the spending power of consumers and cause them to rein back a little in their spending. That remains our central view, with huge amounts of uncertainty around it.”

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IFM Correspondent

November 1, 2016: Britain’s economy grew more than expected in the three months following its vote to leave the European Union despite concern that apprehension over the country’s future would weigh on business.

The economy expanded by 0.5% in the period from July to September, according to the Office for National Statistics. This growth came in largely due to the services sector. Although this was slower than the rate of 0.7% of the preceding quarter, it still remained far stronger than the analysts’ estimates of around 0.3%. This is the first estimate of economic growth for the period, using less than half the data that will be used for the final estimate.

“The economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the vote,” said Joe Grice, the chief economist at ONS. “A strong performance in the dominant services industries continued to offset further falls in construction, while manufacturing continued to be broadly flat.”

“In manufacturing, the contraction in output should be attributed to some unwinding of the massive growth spike seen in the second quarter, rather than industry scaling back production for any referendum related reasons,” said Lee Hopley, chief economist at the EEF, the manufacturers’ organisation. “In line with the raft of survey data, the GDP estimates confirm that it has been more or less business as usual but it doesn’t tell us, however, if this will continue for the foreseeable future.”

Services grew by 0.8% in the quarter. Transport, storage and communication was the strongest part of the service sector, showing a growth of 2.2%, which was the fastest seen since 2009. This was helped along ably by the UK’s film industry.

Analysts had feared the economy would grind to a halt or even contract after the Brexit vote, which has seen some business activity take a substantial hit. The pound has plunged, an indication of investor concern about the country. But the weaker currency also means more exports and increased tourist spending.

“[Consumer spending] clearly benefited from the weakened pound encouraging spending by overseas visitors to the UK. The weakened pound also supported foreign orders for UK goods and services”, said Howard Archer, UK economist at IHS Global Insight.

While the data is important in that it is the most comprehensive reading since the June 23^rd vote, experts warn that the numbers are preliminary and that they do not reflect some of the looming negative impacts, such as an expected rise in inflation. Also, the resilience post the referendum does not say anything about Britain’s ability to perform outside of the EU, said Berenb

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Suparna Goswami Bhattacharya

July 28, 2016: Almost a month after the UK decided to exit the European Union, economists around the globe have come out with data suggesting that the referendum has had a mixed impact on the global economy with certain areas getting affected more than the others.

IHS Markit, a global insight company, in its report stated that Brexit will cut global economic growth by 0.1 per cent in 2016 and 0.4 per cent in 2017. Further, it will reduce growth in some of the world’s largest economies — UK growth to drop from 2.4 per cent to 0.2 per cent and Eurozone to drop to 1.1 per cent in 2017.

In the UK, it is expected to cause major economic and political uncertainty and will weigh down on business and household confidence and behaviour, thus dampening corporate investment, employment, and consumer spending.

Jaspreet Sehmi, senior economist, Dun & Bradstreet, feels that the UK economy is passing through the eye of a storm. With a new government at the helm trying to navigate the UK economy through previously unexplored territory, the journey ahead remains long and uncertain. “We expect the UK to enter a technical recession at some point between the second half of this year and the first half of 2017. Businesses are facing increased uncertainty, and anecdotal evidence suggests that firms are already scaling back investment and hiring plans,” says Sehmi.

In the Eurozone, the overall impact is likely to be negative, as any reduction in size of a single market makes it less valuable for those remaining in it. According to IHS Markit, the UK’s decision to leave will increase political instability and economic uncertainty in the Eurozone, weighing down on business and consumer confidence and activity. Additionally, Brexit has given momentum to other euro-sceptic political parties across the EU, some of whom also want a referendum on EU membership.

Tom Elliot, international investment strategist, deVere Group, says, “This makes it harder for governments to agree to a closer fiscal and political union which many economists believe is the call of the hour. This is illustrated by the difficulty in establishing a euro zone banking union.” Brexit is also likely to distract EU decision makers from core focus areas. The European Union should now be focusing on issues like the banking crisis (with Italian banks the current problem), migration, structural impediments to economic growth such as two-tier labour markets. These problems hinder EU’s ability to exert influence on the global stage, whether economically or politically, adds Elliot.

The Eurozone will also face a loss in competitiveness in manufacturing on the back of weaker GBP and increased uncertainty, potentially delaying investment decisions. “While sterling has remained weak, the swift formation of a new UK government has reduced volatility in financial markets, which should contain the negative impact on confidence going forward,” says Peter Vanden Hout, chief economist, Eurozone, ING.

The extent of the impact on Asia will largely depend on the outcome of the negotiations between EU and the UK. The principal transmission mechanisms of the Brexit shock to the region will come from trade, the financial sector and business confidence. Given the relatively small ties between the region and the UK, the shockwaves will reach Asia mainly via secondary channels.

Ricard Torne, head of economic research, FocusEconomics, says, “While shipments to the UK from Asia ex-Japan are relatively small (around 2.5%), those from the region to the Euro area are much larger and represent around 11% of the total exports. Therefore, the expected slowdowns in the Euro area following the Brexit vote, particularly in core countries such as Germany, will likely hurt Asia’s already-battered external sector.” Nevertheless, the impact on the region will be uneven. The countries which are more reliant on domestic demand, such as India, Indonesia and The Philippines, will weather the storm better than open economies like Korea and Taiwan. Financial hubs Hong Kong and Singapore will also feel the brunt due to heightened volatility in the financial markets, adds Torne.

Brexit will not impact US real GDP growth much in 2016, which is still forecast to be 1.9 per cent. “A relatively small proportion of US GDP growth comes from overseas trade, and the relative strength of the euro against the dollar year-to-date will offer American exporters some protection from any post-Brexit reduction in European investment spending and tourism,” says Elliot.

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Mike Gleason

April 13, 2016: James Rickards is Chief Global Strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and Director of The James Rickards Project an inquiry into the complex dynamics of geopolitics and global capital.

He’s also the author of several best-selling books including The Death of Money and Currency Wars and just released his latest work, The New Case for Gold. James is a portfolio manager, lawyer and renowned economist having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN just to name a few.

Mike Gleason: Jim, we really appreciate you taking the time to talk with us today.

Jim Rickards: Thank you Mike. It’s great to be with you.

Mike Gleason: First off, I’d like you to talk about how you view gold because I think it’s important to start with that before we get further into the discussion. I want people to understand where you’re coming from. Now I know in the book, The New Case for Gold you go through some of the definitions and purposes of gold, but how should people view it?

Jim Rickards: I actually view it as money Mike, and I’ll expand on that a little bit. Although, how I view it is one thing, but how the world views it is another. In other words, you want to take into account different ways people look at gold and think about gold.

If you’re going to own it or going to store wealth in it, again I think it’s a pure form of money, but not everyone agrees with that. It’s important to understand how other people think about it.

On that note, I call gold a chameleon. Sometimes gold trades like a commodity. Sometimes it trades like an investment, and sometimes it trades like money. It’s like a chameleon. You put a chameleon on a green leaf, it turns green. You put it on a tree trunk, it turns brown. It adapts to its circumstances. Gold is often thought of as a commodity. It does trade on commodity exchanges, I understand that, and it tends to be included in commodity industries. The common understanding is gold is a commodity in commodity trade.

I really don’t think that’s correct. The reason is that the definition of a commodity, it’s a generic substance, it could be agricultural or a mineral or come from various sources, but it’s sort of a generic undifferentiated substance that’s input into something else. Copper is a commodity, we use it for pipes. Lumber is a commodity, we use it for construction. Iron ore is a commodity, we use it for making steel. Gold actually isn’t good for anything except money.

Gold is probably the best form of money, but it’s not really good for anything else. People don’t run around the world and dig up gold because they want to coat space helmets on astronauts or make ultra-thin wires. Gold is used for that, but that’s a very small portion of the application. People point to jewelry and say, “There’s a different application,” but I think of jewelry as wearable wealth. No better example than an Indian bride for example where they might have four or five pounds of 18 karat gold necklaces around their necks, and it’s very stunning and maybe attractive, but they consider it to be their wealth. So it’s really just a wearable form of wealth.

So I don’t really differentiate between jewelry and bullion in terms of the monetary gold. So I don’t think of gold as a commodity for that reason. It’s not really input into any process or industrial process, but nevertheless we have to understand that it does sometimes trade like a commodity.

As far as being an investment is concerned, that’s the most common usage. People say, “Well, I’m investing in gold,” or, “I’m putting part of my investment toward bullion gold.” Again, I don’t really think of gold as an investment. I understand that it’s priced in dollars, and the dollar value can go up, and that will give you some return, but to me that’s more a function of the dollar than it is a function of gold. In other words, if the dollar gets weaker, sure the dollar price of gold is going to go up or as has happened recently, if the dollar gets stronger, then the dollar price of gold may go down.

So if you’re privileging the dollar as the measure of all things, then it looks like gold is going up and down, but the way I think of it is I think of gold by weight. An ounce of gold is an ounce of gold. If I have an ounce of gold today, and I put it in a drawer, and I come back a year from now and take it out, I still have an ounce of gold. In other words it didn’t go up or down. The dollar price may have changed, but to me that’s the function of the dollar, not a function of gold. I don’t really think of it as an investment.

That goes to one of the point I make in my book. One of the criticisms of gold, and I don’t think it is a criticism, it’s just a fact is that gold has no yield. You hear it from Warren Buffet, you hear it from others, and that’s true, but I kind of shrug and say, “Well yeah, but gold is not supposed to have a yield because it’s money.” Just reach into your wallet or your purse and pull out a dollar bill and hold it up in front of you, and ask yourself what’s the yield? Well there is no yield. The dollar bill doesn’t have any yield. It’s just a dollar bill, the way a gold coin is a gold coin.

If you want yield, you have to take some risks. You can put the money, put that dollar in the bank, and the bank might pay you a quarter of 1% or something, not very much, but now it’s not money anymore. People think of their money in a bank deposit as money, but it really isn’t money. It’s an unsecured liability of an occasionally insolvent financial institution. The risk may be low, I’m not saying the risk is high or you ought to pull all your money out of the bank, but I am saying that there’s some risk, and that’s why you get a return. Of course, you can take more risk in the stock market or the bonds market and get higher returns. The point is, to get a return you have to take risk. Gold doesn’t have any risk. It’s just gold, and it doesn’t have any return. It’s not supposed to. I don’t really think of it as an investment.

So that brings me to the third part of the chameleon characteristic, which is money. And that’s what gold is. Gold is money. It has no risk. It has no yield. It is the store of wealth. Classic definition, medium of exchange, unit of account. And that’s important.

So the way I think of gold right now, I think of it as money. I think it’s in competition with the dollar, the euro, the yen, the Swiss franc, and other forms of money, bitcoin for that matter, they’re all forms of money. And they’re competing for the subjective preference of people who need money and want to store wealth and I think gold’s doing very well in that context.

Mike Gleason: The idea of a gold standard is getting more and more play these days, and has even been talked about some during the election cycle as certain candidates are calling for a return of the gold standard as a way to reign in all of the out of control government spending, but obviously many out there are very against this idea. And the example by the gold standard naysayers is what happened during the Great Depression. Now former Federal Reserve Chairman, Ben Bernanke famously complained that the Fed was hamstrung by the gold standard during the Great Depression. Talk about this because this is a common belief among Keynesian scholars and economists. Is that a correct assumption to say that the Great Depression either happened or continued as long as it did because the Central Bank had their hands tied by the gold standard? Are we dealing with fact or fiction there with this popular notion?

Jim Rickards: Truly fiction. It’s a combination of outright fiction. Some people who should know better who have their own reasons for disparaging the role of gold, and other people who don’t know better they’ve just heard this repeated so many times that they believe it to be true without ever really studying it.

Now the thing that did contribute to the Great Depression was the fact that the UK, prior to 1914 there had been a very successful gold standard from a global standard and a national gold standard from about 1870 to 1914 with different countries joining along the way. That was disrupted by World War I. After World War I in the mid-1920s, countries were looking for a way to go back to the gold standard, but they made a couple of mistakes.

Instead of going with a pure gold standard, they went with what was called the gold exchange standard. They said international standards can be gold, but it can also be dollars, pounds sterling, or French francs at the time. This obviously was a mix or a hybrid system in which gold played a role, but so did the currencies, which meant that the system as a whole is subjected to blunders and abuses by discretionary monetary policies.

So when I look at the Great Depression, the causes of the Great Depression, it had very little to do with gold and everything to do with really poor discretionary monetary policy, particularly by the Federal Reserve Bank of New York, which eased in the late ’20s when it should’ve tightened, and then tightened in 1929 and 1930 when it should’ve eased. So kind of like the Fed today getting everything wrong along the way.

Now, going specifically to the point, there were two mistakes. One was in 1925 when the UK went back to gold, they went back at the wrong price. I say they, this was Winston Churchill, Chancellor of the Exchequer at the time, picked the pre-1914 price, which was $20 an ounce. Obviously, they expressed it in pounds sterling, but the dollar equivalent was about $20 an ounce. The problem was the UK had doubled the money supply to fight World War I. They printed money to fight World War I, that’s what countries do. Actually, it was John Maynard Keynes who advised Churchill, Keynes did not really favour gold standard, but he said if you’re going to go to a gold standard, you have to get the price right. Keynes favored a much higher price. He said, “If you go back to the gold standard at the old lower price, you’re going to have to reduce the money supply to maintain the parody.” That is contractionary and depressionary, and that blunder did contribute to the Great Depression.

Gold didn’t cause the Great Depression, but getting the price of gold wrong did contribute to the Great Depression. That wasn’t a problem with gold. That was a problem with the politically determined price, and again, what is really discretionary monetary policy rather than gold per say. And Keynes was right, you should’ve had a much higher price. A gold price of $40 an ounce instead of $20 an ounce in 1925 might have avoided the Great Depression completely. We’ll never know, but that could make a very plausible case for that.

Now as far as the gold standard inhibiting or hindering the ability of the Federal Reserve to fight the Great Depression, that is completely false, and the source on that is none other than Ben Bernanke. And I spoke to Ben Bernanke about this personally. Before he became chairman of the Fed or even the Board of Governors for the Fed, he made his academic reputation mostly at Princeton University doing research on the Great Depression, following in the footsteps of Milton Freedman and Anna Schwartz and some others who were the great pioneers of studying the Depression through the lens of monetary economics.

Bernanke wrote a book on it, which I read when I was researching my book The Death of Money and the book before that Currency Wars. And what he revealed is at the time, the law allowed the money supply to be two-and-a-half times the amount of gold. So take the amount of gold that the Fed had, priced in dollars, what was that, multiply the ounces by $20 an ounce, take that number, multiply is by 2.5, and that was the upper limit on the money supply. So the money supply could not legally be greater than that.

Well in fact, the money supply during the Great Depression was never more than one times the gold. In other words, it had 100% ratio. It could’ve been 250%, which means that gold was never a constraint on the money supply. The Fed could have doubled the money supply in the early 1930s without having to worry about gold. So you can’t blame gold for the continuation of the Great Depression. You have to blame the money supply.

In fact, the real problem was that banks didn’t want to lend, and people didn’t want to borrow. This, by the way, is the same problem we have today. Banks don’t want to lend, people don’t want to borrow. Velocity’s increasing, and you can’t seem to get the inflation the Fed wants, and you can’t seem to get the economy moving. That was exactly the situation in 1930. And that’s what Bernanke showed in his book.

So I met him recently, and had a very nice conversation with him. I said, “Mr. Chairman, I’ve read your book to say that gold was not a constraint on the money supply during the Great Depression. Do I understand that correctly?”

He looked at me and said, “Yes, you do.” So in other words, here’s Bernanke confirming to me face-to-face that gold did not constrain the money supply of the United States during the Great Depression. So anyone who says that is true has their facts wrong. Anyone who says that gold caused the Great Depression has his facts wrong because as I say, it was political decisions and discretionary monetary policy, not gold that caused the Great Depression.

Mike Gleason: Last time, you talked about the Fed and the fact that officials there have privately admitted they really don’t know what they’re doing, monetary policies essentially being run as a great big science experiment. They implement unprecedented policies and wait to find out what the results will be. For example, central bankers in Japan and Europe are today experimenting with negative interest rates. Common sense tells us that making people pay interest has to have dire consequences in terms of punishing those savers or protecting capital. Is it just extraordinarily short-term thinking that inspired such a bizarre policy, and do you see a reasonable chance of these monetary experiments yielding good results?

Jim Rickards: I don’t think it’s a question short-term versus long-term perspective. I think the problem is that all of these experiments the Central Bank is conducting are based on models, and the models are flawed. The models are not a good representation of reality. They’re actually either obsolete or just wrong in the sense that they don’t offer a good description of reality.

Your reference to negative interest rates is a good example of that. Let me explain the model, and let me explain the real world, and you can see that the real world is very different than the model, and you’re going to get some very bad unintended consequences.

So the model says the following, “If people are rational economic actors, they form expectations, and they’ll behave today based on their expectations about the future.” The banking authorities impose negative interest rates, which means in simple terms, if you put $1,000 in the bank and you come back a year later, you’re only going to have $990 in the bank. They’re going to take 1% or $10 as a negative interest rate. So they’re going to take your money away. Now the theory is that you don’t want that to happen. You’re a rational actor, you’re like, “Huh. If I just let my money sit there, they’re going to take it away in a negative rate. I’ll go out and spend it. I’ll get something I want. I would rather spend it than sit there and watch it disappear”, like watching an ice cube melt in your hand, eventually the ice cube’s going to be gone. It’s sort of an incentive to get people to spend money, which in theory increases aggregate demand, increases monetary velocity, gets nominal GDP increasing, it helps to solve some of the debt and growth problems that we face today. So that’s the theory.

In the real world the opposite happens. What people actually say to themselves is, “You know what? I’m saving for my retirement. I’m saving for my kids’ college,” or whatever it might be, “if you’re going to have a negative interest rate, if you’re going to take the money away, I’d better save more. I’d better increase my savings to make up for the negative interest rates so I can meet my savings and investment goals long-term,” number one. Number two, what kind of message are you sending? What is the Central Bank saying when they impose negative interest rates? What they’re saying is you’re worried about deflation. So as a consumer, I say, “If you’re worried about deflation, I’m going to spend less. I’m going to wait until the prices come down. Maybe I want to buy a car or a refrigerator or something, but if I think deflation’s coming and prices are going to go down and I wait six months I can get it cheaper.”

So the theory of negative interest rates is that it encourages spending and increases aggregate demand, but the reality is that is actually increases savings and reduces spending and reduces aggregate demand. So it’s a policy experiment. It has the opposite effect of what’s intended, not because these people are stupid, but because they have bad models. That’s just one example, there are many I could give you, but suffice to say the people with the least sophisticated understanding of how economies work are the people who are in charge of the economy, namely the central bankers and in particular the Federal Reserve.

Mike Gleason: You talk a lot about Currency Wars and have written a book on the subject. At some point, it will be in some major player’s interest for gold to be repriced much higher than it is today, and presumably they will have amassed a large inventory of physical gold by that point. Do you envision China or Russia, for instance, making any kind of gold related power-play at some point? What would motivate a major player to break ranks and essentially force a global repricing of gold? And what impact would such a scenario have?

Jim Rickards: I think something like that will happen, but I don’t believe it will come about because of some unilateral power-play on the part of China and Russia. Look, China and Russia are acquiring thousands of tons of gold. It’s very clear. We don’t have to guess. The Central Bank of Russia is fairly transparent. The People’s Bank of China is much less transparent, but we have good information from mining output and Hong Kong exports into China, and the split between retail and government demand to form a reasonable estimate of how much China’s getting, probably they have 4,000 tons, perhaps more versus about 1,700 tons that they admit to. So they have a lot more gold than they admit.

Now the reason China’s doing it is not to launch a gold backed yaun, a global reserve currency around the dollar, I’m not saying that those things absolutely could not happen, but that’s not their short run play. The Chinese know that the yuan is not really ready to perform a true reserve currency function, but what they are doing is hedging their position in US treasury securities.

Right now, China’s reserves are about $3.2 trillion. By the way, that is down significantly from what they were as recently as 15 months ago… they were $4 trillion. So the reserve position is down 20% or $800 billion in the last 15 months, and that’s continuing. So they’ve got a serious problem with capital to begin with, but leaving that aside, they still have $3.2 trillion in reserves, of which about $2 trillion is denominated in US dollars, and most of that are US treasury securities. So they have a huge pile of US treasury securities. They can’t dump them. People talk about it, but the truth is the treasury market is deep and liquid, but it’s not that deep and it’s not that liquid. And there’s no way the market could absorb any significant amount of selling by the Chinese. And if it became disorderly or disruptive or even viewed as malicious, the President could stop it, the President of the United States could stop it since the United States controls the payment system for US dollars, and the ability of the Chinese to sell and settle those US treasury obligations.

So China’s not going to sell the treasury securities. They’re stuck with them, but they fear that the US will inflate its way out of the US debt problem, and they’re probably right about that. Historically, that’s always been one of the ways the US got out from under debt is by inflating the currency. So they’re sitting there, hoping for a strong dollar. Believe it or not, the Chinese want a strong dollar because if you had $2 trillion of government securities, you’d want a strong dollar too. But they fear that the US will try to inflate the dollar, which is reasonable to believe that because the Fed has said, probably many times that they have a 2% inflation goal, which they’ve come nowhere close to meeting, so the Fed is trying everything it can desperately to get some inflation.

So what the Chinese are doing instead, they can’t dump the treasuries, but they are worried about inflation destroying the value of the treasuries, so they’re acquiring gold as a hedge. So they’ve got to think of it as a big pile of treasuries and a big pile of gold. If the dollar’s strong and treasuries maintain their value, the gold may not do very much. But if the US gets the inflation it wants and the value of the treasuries goes down, which is the more likely scenario, the value of the gold is going to go up. China is going to be in this position where they lose on the paper, but they make it up on the gold.

My advice to investors, and what I say to myself is, “You know what? If it’s good enough for the Chinese, it’s good enough for me.” If they can see this coming, why can’t everyday Americans see it coming. That’s why I recommend the 10% gold allocation. I talk about that in my book The New Case for Gold.

Mike Gleason: You’ve written about some significant supply constraints that are developing in the gold market. Talk about this because this is a dynamic that could, itself, blow the lid off of metals prices. What is your take on the global supply situation because we’re seeing an awful lot of gold going from the West to those very strong hands over there in the East, as we just spoke about. And now, new production is on the decline. What do your findings show with respect to the global supply situation?

Jim Rickards: Well when gold goes from West to East, as people say, it stops in Switzerland. Recently, I was in Switzerland and I met with the head of the world’s largest gold refinery. Here’s a guy, and what the gold refineries do, they take gold in the front door, and they ship it out the back door, and in the middle they reprocess it. The gold that they get comes from three sources. There’s what’s called dore, which comes from the miners, that’s about 80% gold. They get what’s called scrap, which is jewelry: rings, watches, necklaces, et cetera. It could be about 75-90% gold depending on whether its 14 karat or 18 karat and so forth, maybe 75% gold. And they get gold bars, bullion bars and coins, which are 99% pure gold. Even that’s not good enough because 99% gold is called 2-9s, 9-9.

What the Chinese want is called 4-9s, 99.99% pure gold. So the refinery takes in the dore, the scrap and the 2-9s. They melt it down and turn it into one kilo bars of 4-9s, and they ship most of that to China.

So this guy, my friend who runs the refinery, he knows who all the sellers are, and he knows who all the buyers are. He knows who the sellers are because that’s how he sources his gold, and he knows who the buyers are because they’re his customers. What he told me is that he’s got a waiting list of buyers, that China wants to buy twice as much gold as he’s going to sell them. He sells to them about 10 tons a week. China would like to buy 20 tons, but he can’t supply it because he doesn’t have that much gold. His plant is working 24 hours a day.

On his buying side, his sourcing, he’s saying, and he’s been in the business for 35 years. He’s saying for the first time, he’s seeing physical shortages pop up. It’s actually difficult to get the gold that he needs to keep his refinery operating and to meet the demand. So again, here’s a guy who’s right in the middle of the trade. Gold is coming out of the UK, London, the US, and elsewhere, the IMF, and it’s going to China. It is going from West to East, but it’s stopping in Switzerland along the way. He’s the guy who turns it into 4-9s gold, which is what the Chinese want, and he’s telling me that there are physical shortages out there. So it won’t be too much longer before there’s a failure to deliver by some dealer or some warehouse gets overwhelmed or the COMEX has to suspend trading because there’s not enough gold in the vault to satisfy the demand by the longs. Something’s going to break and make the price of gold skyrocket, and we are getting closer to that point.

Mike Gleason: Obviously, the metals markets appear to be quite manipulated, but as we begin to close here Jim, what do you have to say to the guy who has been buying for the last few years, but hasn’t seen the price go anywhere aside from maybe the first couple of months of this year maybe? Can the manipulation go on forever, and can they suppress prices and perpetuity or does it have an exhaustion point?

Jim Rickards: It has an exhaustion point, and the reason we know that is we’ve seen three price suppression mechanisms fail in the past 90 years. Go back to the 1920s, 1930s that the gold exchange standard that we talked about earlier where they set the price of gold artificially low, that failed because people said, “Well I’ll just take the gold,” and they couldn’t maintain the pegs, and they were losing gold. One by one they had the devalue their currencies. France in 1925. England in 1931. The United States in 1933. France and England again in 1936 under the Tripartite Agreement. So that ultimately broke down, and the entire international monetary system broke down in 1939 with the beginning of World War II.

And then there was the infamous London Gold Pool of the late 1960s where the G7 countries plus Switzerland banded together and agreed to buy gold to maintain the price, and sell gold as needed to suppress the price. A very simple price manipulation system, and that broke down.

And in August 15, 1971, President Nixon ended the conversion of dollars into gold by the US trading partners. Of course, we all know what happened next. We had hyperinflation, and the price of gold went to $800 an ounce. Then in 1971, it was $35 an ounce, by 1980 it was $800 an ounce. A 25 times increase, a 205% increase in a fairly short period of time.

Then there was another gold suppression which has been going on since the end of Bretton Woods, even though Bretton Woods was over, the United States sold 1,000 tons of gold in the late 1970s and forced the IMF to sell 700 tons of gold. So there was 1,700 tons of gold dumped on the market in the late 1970s by the US and the IMF. That ultimately failed, and of course like I say, the price skyrocketed in 1980.

Thereafter, we stabilised the dollar with monetary policies, we didn’t even try to go back on the gold standard, but we stopped selling gold, but the price suppression continued. The reason we stopped selling gold, by the way, is described in Chapter 1 of my book The New Case for Gold. It’s a very interesting story because it talks about the secret goal of gold on the Federal Reserve balance sheets. I hope the readers enjoy that, but there’s a reason the US cannot sell anymore gold, and it does have to do with propping up the Fed, but we got everybody else to sell gold. We got the UK to sell most of their gold in 1999. We got Switzerland to sell several thousand tons of gold in the early 2000s. We got the IMF to sell 400 tons of gold in 2010. Poor Canada, just this year revealed that they are the first major developed economy to have no gold at all. So even the poor Canadians had to dump 2,000 tons.

The US stopped selling our own gold, we went around the world and got everyone else to sell their gold, they did sell, and now they’re running out. Meanwhile, China’s buying more and more and more. So we are getting to the exhaustion point. These manipulations can continue for a while. It’s just a question of supply and demand. If people are willing to dump gold, and there’s not that much demand, sure that’ll drive the price down. But here you have a situation where people have stopped dumping gold for their own reasons, but the demand continues, and that’s going to force the price to go up.

Mike Gleason: We wish you and your new book every success. Thanks so much Jim.

Jim Rickards: Thank you Michael.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week

The post Why China is buying gold appeared first on International Finance.

Suparna Goswami Bhattacharya

February 19, 2015: If one were to describe India’s growth story in one line, it would read something like this– A nation of unrealised potential. The tag unfortunately has stuck with the country for a long time. And now, two decades after India started is liberalisation policy, the country finally seems all set to unleash its full potential – at least this is what most economists around the globe have to say.

Acting as a catalyst to this growth story is US President Barack Obama’s recent visit to India which may instill confidence in investors to pile up Indian stocks throughout 2015.

“Obama has put the seal of approval on the Modi administration, because his reforms are pro-growth and Modi appears more pro-US than previous Indian governments,” says Tom Elliott, international investment strategist, deVere Group. And there is an ideological aspect as well to US support. “Modi wants to cut the subsidies and licenses cultures, which are objects of scorn for the US,” remarks Elliott.

Interestingly, US has its own reasons to pitch for India’s growth story. A stronger and more vibrant economy will help India act as a counterweight to growing Chinese influence in Asia, which will be a relief to the US, which worries that it will be over-stretched in Asia should China become belligerent over territorial claims, amongst other factors.

On the heels of China posting its lowest GDP growth rate in 25 years, the International Monetary Fund (IMF) released an update to its World Economic Outlook report predicting that India’s economy will overtake China’s in terms of annual growth rate by 2016. It predicts India’s growth rate at 6.3% and 6.5% for 2015 and 2016, respectively. For the same period, China is expected to grow at 6.8% and 6.3%, respectively. This puts India’s projected growth in 2016 ahead of its estimates for China.

And though economies like Bangladesh, Sri Lanka, and Philippines might grow more than China, but from a global perspective, they will hardly make any major impact. “There is, bluntly, only one other economy which could eventually equal China’s punch: India. In terms of size and per capita income, the Indian economy stands where China’s did in the early 2000s – a time where the country started making its impact felt globally,” says Frederic Neumann, economist HSBC, in his report.

If a comparison is made of the date from which officials in both countries adopted reforms in an earnest way (China in early 80s and India in early 90s), then India is actually a little ahead of China at the same stage of development process.

The main factor why India could not match up China’s growth is the share of manufacturing in GDP. In China, the sector contributes 22% to GDP while for India the figure stands at 15%, according to data released in 2014 by United Nation. “The flip side is that services are much more important in India than in China (57% of GDP vs. 46%). Since efficiency gains are easier to attain in manufacturing than in services, the difference in productivity growth between the two countries is thus not too surprising,” says Rupali Sarkar, economist at HSBC.

This also means that if India wants to match China’s development trajectory, it will need to increase the share of manufacturing in the economy. Thus, the ‘Make-in-India’ campaign launched by the central government to tap into the large manufacturing potential of the country comes at the right time.

Devashish Mitra, Professor of Economics & Gerald B. and Daphna Cramer Professor of Global Affairs, The Maxwell School of Citizenship and Public Affairs, Syracuse University, said India’s success heavily depends on how fast the government is able to bring about further reforms, most importantly labour reforms (getting rid of outdated laws) and reforms in land acquisition laws. “Tax laws need to be simplified and the legal system needs to improve so that contracts can be enforced,” says Mitra.

Recovery of rupee, general positiveness about the economy post elections are other factors generating interest among investors. In 2013, the rupee experienced a sharp depreciation in reaction to the anticipated tapering by the US Federal Reserve. However, India has now won back the confidence of the international financial markets and depreciation has been halted.

Also, GDP rose to 6% in 2014 and there has been a fall in inflation. Thanks to these factors, marked improvements in the economy are anticipated.

In Asia, China and India are the two major economies. Elliott feels that India has an edge over China since it is a more vibrant society and is a democracy (the economy is expected to be more stable in the long run). “Although India is often perceived as a difficult place to do business, it is manageable. Bureaucracy is also expected to reduce under the new government,” says Elliott.

“China is expected to slow down and if the Indian government uses its mandate to push through the next generation of reforms, India can easily overtake China in the next couple of years,” remarks Mitra.

Many feel that for India, a growth rate of 8-10% per annum in the next five years is manageable, provided it utilises its cheap, unskilled labour, which will help in the growth of the manufacturing sector.  Also, India happens to have excellent soft skills and English is widely spoken.

The sooner it does away with its long bureaucratic process, the better it stands a chance to win the battle against China.

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The post Betting big on India appeared first on International Finance.

Kamilia Lahrichi

January 12, 2015: There will be no truce between the Argentine government and its foreign creditors, despite the expiration of a provision on December 31, 2014 that could have paved the way for a settlement, hence leaving the economy in limbo and cut off from global financial markets.

In 2001, Latin America’s third largest economy defaulted on its debt. Since then, it has been entangled in a legal battle with hedge funds that bought its debt on the cheap during the crisis that year. In 2014, the South American nation again burned its bridges with creditors.

Argentina was keen to pay a part of its debt – $539 million – to its “hold-out” bondholders but a US judge ruled that the country could not pay the restructured bonds unless it also paid about $1.5 billion to two hedge funds – Aurelius Capital Management LP and Elliott Management Corp.’s NML Capital Ltd.

These were coined “vulture funds” because a chunk of their profits comes from buying the debt of distressed companies or countries like Argentina. NML Capital, for example, is expected to get $800 million for the South American country’s debt securities that initially cost $50 million.

Foreign creditors demand today that Argentina pay back defaulted bonds at 100 cents on the dollar.

The “Rights Upon Future Offers” (RUFO) clause stipulated that if Argentina “voluntarily” made a better offer to some creditors before December 31, 2014, other bondholders would be entitled to the same treatment. This includes those who have restructured their debt in 2005 and 2010.

Notwithstanding the expiration of this provision, Argentina spurned an opportunity to settle the dispute.

Deadlock

On January 5, 2015, Economy Minister Axel Kicillof asked foreign creditors to accept a haircut of 65% on the bond principal – an offer that fell short of their demand.

He then stressed that it would be too costly for Argentina to fully repay its debt to the “vulture funds” in a Twitter blast on January 8, 2015. “Argentina wants to pay 100% of the creditors, but with fair, legal, equitable and sustainable conditions,” he wrote.

Technically speaking, the impasse with foreign creditors does not dramatically change Argentina’s gloomy economic outlook.

The South American economy still suffers from sky-high inflation. It slipped into recession the last quarter of 2014 and its gross domestic product fell 0.8% the third quarter of 2014 from the same period in 2013.

Prices for soybeans – its main commodity – are plummeting. Besides, the administration is crimping imports, amid depleting US dollars reserves, and heavily controlling the peso to keep US dollars on Argentine soil.

Juan Pablo Ronderos, Business Development Manager at abeceb.com, an economic consultancy in Buenos Aires, forecasts a contraction of the economy of 1% in 2015.

How long talks with foreign creditors will take “depends on the need for currency of the [Argentine] government,” he explains.

“At the moment, the authorities have a stock of international reserves higher than what they expected a few months ago, hence the possibility of an immediate agreement is diluted,” he says.

President Cristina Fernandez de Kirchner was proud to announce that central bank reserves amount to US$31.4 billion – a 2.7% increase during 2014.

“The country needs dollars but the situation is not as critical as it may sound,” adds Luciano Cohan, Chief economist at Elypsis, a Buenos Aires-based market and political consultancy.

Besides, Argentina is relying on a $11 billion loan from China to slow the depletion of its currency reserves.

A way out?

“It is clearly necessary to find an agreement with the holdouts in order to completely solve the issue and be a more predictable market for investors,” Mr. Ronderos notes.

He explains that such an “agreement is necessary but not sufficient” to alleviate the country’s economic woes. The Argentine government needs to tackle macroeconomic imbalances, upgrade its regulatory framework and create a competitive economic environment.

In the end, Argentina’s economic salvation lies in the October 25, 2015 presidential election as President Fernandez de Kirchner is constitutionally barred from running a third term.

“I think that the three candidates most likely to succeed Cristina [Sergio Massa, Mauricio Macri and Daniel Scioli] have an economic policy that will be very different from the current government’s,” says Mr. Cohan.

Even Mr. Scioli, the current administration’s official candidate, is likely to have a more market-oriented policy.

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The post An unhappy New Year for Argentina appeared first on International Finance.

Suparna Goswami Bhattacharya

November 7, 2014: James Rickards, American lawyer, economist, investment banker and author of books of like Currency Wars and Death of Money, is one of the speakers at the ICA Conference in Dubai. He discussed factors that could lead to collapse of the International monetary system with IFM. Excerpts:

You have said that the collapse of the International monetary system does not really mean end of the world. One has to devise new rules.  What exactly do you mean by new rules?

The international monetary system has collapsed three times in the past 100 years — in 1914, 1939 and 1971. Each collapse was followed by a new system devised by the leading trading and financial powers of the time. These new “rules of the game” are arrived at in one or more international monetary conference. Famous examples include the Genoa Conference of 1922, the Bretton Woods Conference of 1944, and the Smithsonian Agreement of 1971, but there have been many others. A new international conference today would probably include the US, EU, Japan, China and Russia as its major players. It would likely be held under the auspices of the G-20 and the IMF. Other important participants would include Brazil, India, Saudi Arabia and the UK. Possible bases for a new international monetary system include the current form of world money, the special drawing right (or SDR), and possibly some role for gold.

I understand it would be difficult to predict, but when do you believe the collapse will happen?

Using the science of complexity as a theoretical model for understanding the potential for collapse in the monetary system indicates that the collapse could come at any time. In all likelihood, the actual date is probably still a few years away. But because it could happen at any time, investors should begin making preparations now, including holding some physical gold, cash, land, fine art and other non-digital assets that will preserve wealth and cannot easily be destroyed or confiscated by digital means.

What according to you are the reasons behind the collapse?

The main source of instability is excessive debt combined with persistent deflation that increases the real value of that debt. The debt comes from sovereign deficits, and the deflation is a natural consequence of the global depression that began in 2007. Other sources of risk are the over-concentration of bank assets in fewer hands, the enormous expansion in the gross notional value of derivatives, and the density function resulting from the interconnectedness of major financial institutions, markets and exchanges.

Given China’s rising debt, do you think the collapse might get triggered from there? Or, is the debt problem just a hype?

The debt problem in China is not hype. The collapse of the debt and property bubble there could well be the catalyst for a global economic crisis. About 45% of Chinese GDP is infrastructure investment and a substantial portion of that is wasted on non-revenue generating and unneeded projects and financed with unpayable debt. This debt is funded in part through wealth management products (WMPs), which are like high-yield junk CDOs. This WMP bubble is in addition to the general residential property bubble that has been financed with regular mortgage products. Another source of debt is off-balance-sheet provincial government obligations. China is the greatest debt bubble in history and it will unwind with adverse and unpredictable consequences for global capital markets.

Retail investors also face a major setback. What advice do you have for them?

Investors should allocate their portfolios in approximately these portions: gold 10%, land 10%, fine art 10%, cash 30%, government bonds 10%. Alternatives such as hedge funds, private equity and venture capital 30%. This portfolio is robust enough to handle inflation and deflation. The cash component reduces volatility, hedges against possible deflation and offers embedded optionality to pivot to another asset class as visibility improves.

Do you think such scenarios make people more optimistic about crypto currencies like Bitcoins?

I see the rise of crypto-currencies as a sign of waning confidence in traditional currencies, such as the dollar. I expect the trend towards alternative currencies, such as Bitcoin, to grow as central banks continue to fail in their efforts to manipulate asset values.

Also read:

Decoding China’s debt 

Investors losing interest in South Africa:  John Kane-Berman

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