Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Friday, May 4, 2012 Are central banks conspiring to manipulate the gold market? Another look at US real estate...through the eyes of a foreign investor, Plus, Bill Bonner on the fool’s errand of “reforming” education and plenty more... ------------------------------------------------------- World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY!   Fat Gold Fingers China Buys Gold...No Matter Who’s Selling   Eric Fry Reporting from Laguna Beach, California... Someone is selling in size...Someone is buying in size. That’s what makes markets, as the saying goes. But that’s also what makes market manipulations, according to the bloggers at Zero Hedge. The seller in this case is very large and very sloppy, perhaps intentionally so. The buyer is also very large, but very patient and methodical. Trapped between these two powerful opposing market participants we find a “range-bound” gold market. Let’s take a closer peek at the curious goings-on... Last Monday, a large early-morning sell order in the gold market whacked the price of the precious metal by about $15 in a matter of seconds. “The CME Group Inc.’s Comex division recorded an unusually large transaction of 7,500 gold futures during one minute of trading at 8:31 a.m.,” The Wall Street Journalreported. “The sale took out blocks of bids as large as 84 contracts in one fell swoop and cut prices down to $1,648.80 a troy ounce [from $1,663.00]. The overall transaction was worth more than $1.24 billion. “Gold traders buzzed with speculation that the transaction was an input error — a so-called ‘fat finger’ trade,” the Journal continued. “‘Or a Gold Finger as it might be known in the bullion market,’ traders at Citi joked in a note to clients. “Still, not everyone agreed Monday’s slip in gold was caused by a keystroke error,” said the Journal. “Chuck Retzky, director of futures sales for Mizuho Securities USA, said that silver prices suffered a similar leg down at the same time as gold, tumbling 35 cents to $30.805 a troy ounce, but other markets like Treasurys, currencies and stocks were unperturbed. ‘To do it both in gold and silver tells me that it wasn’t a trade done in error,’ Retzky said.” A second trader chimed in, “No one who has the account size and the money to trade thousands of gold contracts would do it in one transaction, that’s just stupid.” Or maybe this “stupidity” was intentional, as the folks at ZeroHedge suspect. Again yesterday, a large 3,000-plus lot gold sell order hit the Comex overnight trading system around 1:30 AM, Chicago time — causing the gold price to quickly fall more than $5. “Volume that size is unusual for that time of the day on the COMEX,” ZeroHedge remarks. A few hours later, shortly after the Comex opened the gold pits for the regular daytime trading, a couple of very large sell orders knocked $10 off the gold price in a matter of minutes. These large, sloppy sell orders are no accident, ZeroHedge insists. They are simply some of the most flagrant examples of what could be market manipulation by Western central banks. ZeroHedge does not point fingers at any particular “fat finger,” but it does wonder aloud if the Bank for International Settlements (BIS) may be involved. “[A few weeks ago],” says ZeroHedge, “somewhat tongue-in-cheekly, we presented the ‘people bringing you currency manipulation on a daily basis,’ or in other words, the BIS execution team for Europe’s central banks, which is most directly engaged in FX and precious metals ‘interventions’ when needed. “The execution chain we presented was headed by one Richard Austin Jones, head of central bank services at BIS, Basel, yet more importantly the actual trader at the bottom of the totem pole was a Mikaël Charozé, whose various tasks included the ‘management of the liquidity for big amounts’ primarily interventions and portfolio diversification, as well as ‘holding and managing proprietary positions on all currencies including gold.’ “We posted this observation on April 5,” reports ZeroHedge. “Funny then that just 10 days later, one would never know that Mikaël no longer counts ‘holding and managing proprietary positions on all currencies including gold’ among his duties as well as task of ‘management of liquidity for big amounts including interventions.’ [I.e. the BIS Website removed all of this language from Mikaël’s job description]. In fact his entire profile, since our little humorous exposés, appears to have been rather completely altered. Inquiring minds would love to know: why?” Why, indeed?  Many gold-market participants have long-suspected that Western central banks (and other agencies of currency debasement) conspire to suppress the gold price. According to this conspiracy theory, the central banks periodically pound on the gold price in order to prop up the value of the paper currencies they print. But despite the anecdotal evidence supporting the conspiracy theory, no one has ever caught one of the conspirators in the act. Like Sasquatch, the conspirators leave lots of great, big footprints, but no one ever manages to trap them in their caves. So maybe there are no conspirators, just lots of really stupid and sloppy gold sellers.  Meanwhile, the buy side of the gold market is much less mysterious. “Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year.” Sprott Asset Management observes in its April letter. “China has now imported 436 tonnes of gold through Hong Kong over the past 8 months, compared with only 57 tonnes over the same 8 month-period a year earlier (July 2010-February 2011).” In other words, on the other side of every sloppy gold sale by a BIS trader (or whomever) you are likely to find an eager Chinese buyer. The recent surge in Chinese buying represents a whopping 25% increase in total global investment demand for gold. “There isn’t a physical market on earth that can withstand that type of demand increase without higher prices over the long run,” Sprott declares, “and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last 10 years...Where is the gold going to come from? We ask because we don’t actually know.”  So there you have it...The invisible “fat fingers” are selling gold. The very visible Chinese are buying it. Place your bets!   The Great Comeback No One Is Expecting A shift is under way that has been so subtle I’d wager not one in 10 Americans is aware of it. The effects of this mounting trend will be felt from Topeka, Kan., to Shanghai, China. If you play this shift correctly, you could grow wealthy. If you miss it, you’ll sacrifice a fortune. Get the full story here. The Daily Reckoning Presents Bar Stool Wisdom from São Paulo   Chris Mayer “One cannot overestimate the importance of that hotel bar,” says veteran journalist Mort Rosenblum in his handbook for foreign correspondents, Little Bunch of Madmen: Elements of Global Reporting. The basic idea is that local intelligence has a remarkable tendency to collect in little pools in hotel bars where travelers and locals mix. You can learn a lot on a bar stool talking to a local or even chatting with another traveler just blowing through who you might not get otherwise. (The title, by the way, comes from a line by H.R. Knickerbocker, a renowned Hearst correspondent from the 1930s, who wrote: “Whenever you find hundreds of thousands of sane people trying to get out of a place and a little bunch of madmen struggling to get in, you know the latter are newspapermen.” I think this applies equally well to those hard-boiled — and successful — investors who love and seek out lonely or forlorn markets.) I’d amend Rosenblum’s advice to include the airport lounge bar. I was sitting in one in São Paulo, waiting for my long overnight flight back to New York. It was crowded, as everything in São Paulo seems to be. I ordered another Caipirinha, and this Brazilian guy sat on the one empty stool next to me. We got to talking, and eventually it came out that I was an investor hunting around for ideas in South America. “You should invest in real estate,” he told me. “In Brazil?” I said. “[Expletive] no!” he said. “In the US. Brazil is expensive. Everything is expensive in Brazil.” I told him he might be the first Brazilian I met who wasn’t gung-ho about putting money in Brazil. “The problem with Brazil is that it is good, but then it goes very bad. It has always been this way. When it is good, you put your money somewhere else before it goes bad again. Now it is good,” he said. “The problem with Brazil is the Brazilians,” he added with a chuckle. “I’ve heard that joke before, but it was about Argentina and the Argentines.” He laughed. “Well, for them, it is true!” He told me he was with a group buying apartments in New York. They are good buys, he says. He gave me some figures about what his group owns, but since I had a head full of Caipirinhas and it was nearly 11:00 at night, I had no desire to pull out pen and paper and start taking notes. We talked for a while longer, and then our flight began boarding. We exchanged cards and wished each other well. Of course, now I can’t find his card. But it doesn’t matter. The story highlights an interesting point: For overseas buyers, US real estate is cheap. This influx of foreign capital helps boost the prices of US real estate, providing almost a floor on valuations. Recently, I chatted with the co-manager of a Florida real estate fund. He made the same point. There’s been a flood of South American investors looking for second homes and investor properties. In some markets, this is more pronounced than others, of course. The Brazilians, for instance, aren’t buying property in Detroit. But in Miami, yes. I remember reading reports last year about how more than half of all condo sales were to foreign buyers. And for newly built condos, that figure jumped to 90%. I could be wrong about this, but my gut tells me most Americans still think US property is headed lower. Or at a minimum, they think it is dead money. Investors have a tendency to look behind them. They tend to shun what’s done poorly in the recent past. There have been some surveys with results in this direction. This from the Real Estate Economy Watch reporting on a survey of US homeowners: “The five-year-long real estate depression has taken such a toll on homeowners that they fear falling values four times more than fires, and they are twice as likely to monitor local prices than their own cholesterol levels.” Yet even in commercial property, you can get better deals in the US than in comparable markets abroad. In New York, you can get yields on commercial property twice what you could get on comparable property in London (non-distressed). As a result, the money is starting to flow back to the US. This from the Wall Street Journal: European investors bought $1.6 billion worth of real estate in the US in 2011, more than double the $700 million they invested in 2010, according to data from Jones Lang LaSalle. While the figure is still far below the $8.4 billion bought in 2007, it shows activity is picking up. It’s an interesting dynamic that sometimes gets overlooked. It also seems to put a floor on high-quality US real estate in big cities where such foreign money might look to park some cash — New York City, Miami, Chicago, Los Angeles and the like. There is still a lot to do in cleaning up the wreck of the epic bubble. According to the real estate firm HFF, banks have $3-plus trillion of commercial real estate debt on their books: Banks have approximately $2 trillion of core commercial real estate loans on their books: CMBS [collateralized mortgage-backed securities] account for $1 trillion, and life companies are approximately $300 billion of direct loans maturing throughout the coming decade. This mountain of maturing property loans will require a lot of refinancing. Given the huge bubble that created this debt, much of this loan pool will also require additional equity. In other words, borrowers are going to have to come up with more money to roll over or refinance the debt. This is the opportunity for investors — Brazilian or otherwise. Because of those maturing loan pressures, pricing for new investors who want to put money in is not bad. Nobody is stealing properties these days, at least not many of them. There is a lot of competition hunting around US real estate right now. But good values are not hard to find, depending on the market and property type.  I’ve surveyed a number of the larger deals. With interest rates so low, borrowers are locking up 10-year notes on commercial property for 4.7-5.8%. If you want a shorter term, you can get even lower rates. Healthcare Properties did a three-year deal last year at 2.7%. And I’ve seen plenty of five-year notes at 3.6% and 3.7%. It’s a once-in-a-lifetime chance to own property at über-low financing costs. Property owners on current rents can earn cash-on-cash yields of 6.5% to as much as 11%, depending on the property type, quality and location. That’s better than what you can earn in other assets taking similar risks. And at the end of the day, you own a tangible asset that central bankers can’t print. In fact, money printing probably aids you in the long run, as it eats away at the value of your debt and raises the replacement cost of building your asset (discouraging competitors). Plus, your rental rates will rise over time. Remember that real estate is cyclical. We just had a huge bubble that peaked in 2007. We had a very painful bust that found its bottom sometime in 2009. We are now in the gradual recovery phase. Investors have begun the long process of refurbishing property, recapitalizing it and refinancing it. There is still more to do, and there are still good values out there in US real estate. If you don’t see it, you’re too close to it. Just talk to someone in Brazil. Chris Mayer,  for The Daily Reckoning Joel’s Note: Chris’s latest research presentation provides a classic example of “contrarian investor” mentality. In it, Chris makes a few bets that will, no doubt, invite scorn from the mainstream...which is just the way he likes it. To discover the 3 “bombshell events” set to explode in 2012...and the two lucrative investments Chris has identified to take advantage of them, simply turn your speakers on and click here.   The One Retirement Plan Obama Can’t Touch If you’ve already retired, or want to retire soon, I urge you to watch this video presentation before we have to pull it down. This “Secret $200 Retirement Blueprint” shows you step-by-step how to grow a monster-sized nest egg with a little time and a tiny grubstake. Click here to watch this video presentation now.   And now over to Bill Bonner who has the rest of today’s reckoning from Atlanta, Georgia... Economic Recovery Education   Bill Bonner Feelings...  Whoa whoa whoa...feelings... — Morris Albert Our plane got delayed. This left us in a small waiting room for longer than we wanted to be there. The two large TV screens were inescapable. Who watches this stuff? Poor schmucks.  The more they inform themselves by watching TV news, the less they really know. If they watch long enough, their brains must become like a zombie city, populated by zombie characters they’ve seen on TV...animated by the zombies’ fictions...and dominated by zombie emotions from their two-dimensional personages on the LCD screen.  Yesterday morning, the most important event in the Atlanta area was the death — apparently by suicide — of a well-known football player. We never met the man; we had no particular reaction one way or another. But the tube requires feelings. One reporter after another...one interview following another...all zap the reader with easy emotions. After a while, if you are still unmoved, you think there must be something wrong with you. But it’s probably always been that way. The popular media stirs group feelings and mob emotions. The crowds at the arena...the thousands at the coliseum and those in the stalls at the theatre — they need heroes and villains, not complex ideas and ambiguity.  Of course, ideas can be made accessible by the masses. But only by stripping out the complexity and nuance, making them so barren and so remote from the whole story that they are rarely more than collective fantasies, shared as feelings...  The masses don’t want to think. They just feel. Every flack...and hack politician knows that feelings sell. Not ideas.  That’s why Ron Paul...an idea guy...is trailing Mitt Romney at such a distance.  The masses form their opinions...choose their candidates...and spend their money on the basis of feelings. Real thoughts are banished.  The presidential race is really little more than a contest to which line of guff most voters will take...that is, how they will feel about the candidates and their themes. If you watch TV you’re tempted to believe that... ...the US was hit by some kind of economic firestorm. Maybe it was caused by Wall Street greed. Maybe the regulators made mistakes. Or maybe it was just a natural thing, the way things work.  Thanks to the wise decisions of its leaders, the US economy is now recovering. Europe is having a rougher time; its leaders are not fully in charge of the situation. But even in America the damage was so severe that recovery will be difficult. More help from the federal government may be needed. Perhaps more legislation — targeted tax favors, aid to young people, more spending on education...and so forth. Of course, it’s not just TV that encourages this kind of non- thinking. In The Wall Street Journal (!) this week, for example, was another editorial explaining why education is necessary to GDP growth.  “Education is the key to a healthy economy,” say George Schultz and Eric Hanushek. They show that societies with the highest test scores in math — notably Taiwan and Singapore — also have had the highest GDP growth rates. Well, surprise, surprise. Math is the common language of engineering and science. And engineering and science are what it takes to make the stuff of GDP growth. Little wonder, that the people who work the hardest at math are also those who make the most stuff. The authors didn’t mention that when people from Taiwan and Singapore come to the US, they continue to work harder at math than native born Americans. Whatever the defects of the school system, it doesn’t keep them from getting advanced degrees in science and engineering and going on to earn a lot of money. And they don’t mention that the US already spends much more per student on education than either one of them. So, the reasonable question is not what’s wrong with US education...but what’s wrong with Americans. Are they lazy? Or just stupid? But instead of really analyzing why the US spends so much on education and gets, relatively, so little... ..or even wondering why anyone should give a damn... ..the authors call for “reforming” our K-12 system. What do they mean by that? How would it make anyone any better off? And if it were such a good idea, why haven’t people already “reformed” the schools?  The typical reader doesn’t think about it. He merely feels it is the right thing. And more thoughts... A candidate who thinks! Back to the ‘recovery’...a typical ‘news’ consumer would also believe that the Fed plays a vital role too. Ben Bernanke looks like the kind of guy who might know something about economics. He was head of Princeton’s Economics Department after all. So, if the recovery doesn’t continue, the Fed will probably put in more money. Everybody knows that money is what makes the economy go! But is it? The only presidential candidate with his thinking cap on, says no. The Financial Times allowed Ron Paul to voice his thoughts on central banks in yesterday’s issue. They are “intellectually bankrupt,” he says. His argument will be very familiar to Dear Readers: The gist of it is that central banking is a fraud. Honest economists...and thoughtful people with real jobs...know that central planning is an ineffective way to add wealth. If you could get rich by printing money, every central bank on the planet would run the printing presses night and day. But they don’t. Because it doesn’t work that way. You only know what real wealth is by allowing buyers and sellers to set prices. The prices tell you what things are worth...providing a measure of the goods and services that people actually want. Real money represents real savings. It — and the interest rates people ask for lending it out — tell investors how much capital is available, and at what price. You can print up all the pieces of green paper you want. It will only distort the picture, mislead investors, and cause them to misuse capital. The more central planning, the more mistakes.  The Fed determines the quantity of money available to the market...and the price of it (at least for short term loans). It creates “money” apparently out of nothing...that is, counterfeit money...money with no resources or savings behind it. Then, it dictates interest rates. Investors err; that is how they created the housing bubble in ’05-’07, for example. And now the Fed is compounding its failures of the past...leading to even bigger errors...even bigger bubbles...and even bigger blow-ups. “Printing unlimited amounts of money does not lead to unlimited prosperity,” says the congressman. Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com