Is Gold Manipulated ?

LIBOR Manipulation Leads To Questions 

Regarding Gold Manipulation

The ‘Liebor’ scandal is the latest scandal to befall Wall Street and City of London banks and official regulators and central banks.

The Libor fixing scandal is amusing as everybody- all the talking heads and ‘experts’ are “shocked,  shocked”  to  discover that this benchmark interest rate underlying trillions of dollars worth of financial transactions worldwide was being manipulated

This is despite more astute analysts such as Gillian Tett and others warning that rigging was taking place and LIBOR was a fiction as far back as in 2007.

A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently.

Similarly, the gold market has the appearance of a market that is a victim of “financial repression”.

Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today.

The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth.

However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact.

It will then – belatedly - become accepted wisdom among 'experts.'  Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.”

Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.

Many astute analysts are asking today (see Commentary) - why would the gold market be completely immune to such intervention and manipulation?

The last thing insolvent banks and governments want is a surging gold price.

Perverted and ‘unfree’ markets create profound risks financial systems and economies and for all investors and savers. They also present opportunities.

As ever, it is prudent to be on opposite side of official manipulation as ultimately the free market forces of supply and demand will always win out.

Smart money internationally remains short fiat currencies and long gold.

Gold price manipulation detailed in latest Thunder Road Report

Paul Mylchreest claims to show absolute proof of massive gold price manipulation (suppression) in a detailed analysis of price patterns in his latest Thunder Road Report. His arguments are compelling.

Paul Mylchreest's irregularly produced Thunder Road Report always makes for fascinating reading on matters metals and mining and the latest of these - sent out yesterday - is no exception with a detailed analysis of what Mylchreest sees as ever continuing big money, technically illegal, and large scale, manipulation of the gold market.  A position U.S. pressure group GATA has also taken for many years and the GATA work and findings are also well covered in the report with much implied praise for the group's work on this subject.

Mylchreest backs up his arguments with a succession of Kitco daily gold price charts which show, in his view - and his arguments are compelling - that there are some obvious  market sale algorithms in place which kick in virtually every time the gold price starts accelerating upwards - and that these interventions happen at precise times on a regular basis - the most notable of which is at 8 am London time and 3 am New York time - all designed to colour the trading pattern of gold on the principal world gold markets, and also designed to convince putative gold investors that the precious metal is not necessarily the safe haven it is cracked up to be.

Mylchreest's report runs to 56 pages and a full copy of it is available  below

see also :

http://www.letemps.ch/Page/Uuid/628033fc-cea4-11e1-870a-d199398163a7/Prix_de_lor_les_grandes_manœuvres

and our other articles on The Libor Scandal

Prix de l’or: les grandes manœuvres

PAR FRANÇOIS GILLIÉRON*

Prix de l’or: les grandes manœuvres Le scandale qui vient d’éclabousser la Barclays Bank à propos de la manipulation du taux interbancaire, le fameux Libor, est instructif à plus d’un titre

Le scandale qui vient d’éclabousser la Barclays Bank à propos de la manipulation du taux interbancaire, le fameux Libor, est instructif à plus d’un titre. D’abord, parce que les grandes affaires de corruption annoncent souvent des fins de règne, ce qui laisse à penser que la mise à pied du tout-puissant patron de cette banque en annonce d’autres. Mais, aussi, parce que toute cette affaire prenait sa source à l’occasion d’un fixing. Comprenez un accord car­tellaire, par définition opaque. Or, pour les financiers, la notion de fixing est d’abord rattachée au métal jaune, dont le prix est ainsi arrêté quotidiennement à Londres.

D’ici à penser que le prix de l’or a fait l’objet de nombreux «arrangements», il n’y a qu’un pas, dont les médias parlent ces jours-ci. Des traders connus détiennent en effet d’énormes positions dites «short» qui visent à faire baisser les prix. Plus largement, le métal jaune a de nombreux détracteurs. Pour ne pas dire de puissants ennemis, à commencer par les banquiers centraux qui ne veulent surtout pas lui reconnaître son statut de monnaie refuge. Ces derniers savent, en effet, que la hausse du prix de l’or coïncide souvent avec une gestion laxiste de la masse monétaire dont ils sont justement responsables.

Quant aux banquiers, leur relation à l’or est ambiguë. Officiellement, ils vantent les mérites de diversification d’un tel actif et recommandent les actions minières ainsi que des achats dits «en compte-métal». Dans ce dernier cas, les banques les plus prudentes détiennent dans leurs coffres les quantités correspondantes pour être en mesure, en cas de situation exceptionnelle, d’allouer à chaque client la quotité physique qui lui revient.

Mais, le plus souvent, la part de l’or détenue par les banques sous forme de lingots ou de pièces est faible par rapport aux encours des comptes métaux, sans parler des produits structurés détenus dans leurs livres et qui totalisent des chiffres immenses. Si une crise importante devait survenir, l’émetteur ou la contrepartie de ces derniers risque fort de se retrouver aux abonnés absents.

C’est dans cette logique qu’il convient de poser une question encore incongrue: verrons-nous bientôt apparaître une divergence notoire entre le prix de l’or physique et celui de l’or-papier? Officiellement, non. Mais la mémoire collective de l’Occident a oublié les grandes spoliations du passé, et rares sont les Américains qui se souviennent qu’un de leurs présidents, peu soucieux de protéger la propriété privée, avait simplement déclaré illégale en 1933 la détention d’or par les particuliers. La manipulation de l’or, monnaie ultime, reste plus que jamais à l’ordre du jour.

* Consultant indépendant

Into the Matrix

Into the Matrix

The Matrix is a colorfully insightful mosaic of more than 5,000 historical investment periods over the past century. It presents the returns and more for every starting year and ending year since 1900.

The most powerful aspect of the Matrix is its ability to highlight the pockets of above-average and below-average returns for investors with decades-long horizons, while also demonstrating the calm, long-term average available only to investors with century-long horizons. When Bull's Eye Investing was published, the early signs of a secular bear were just appearing on the edge of the chart. With the Matrix now updated with nine more years of results, it's becoming clear that this may be one of the worst periods of stock market returns.

For perspective, here's a small image of the version of the Matrix that was included in the book  at http://www.crestmontresearch.com/stock-matrix-options/.

The chart presented below, which you may select to link to the original 47KB PDF document, provides nominal rates of return for the S&P 500 index (including full reinvestment of dividends) for each full calendar year period from the beginning of 1900 through the end of 2011 *See explanations below

All in all, a very effective way of presenting 105 years worth of stock market performance data, including what rate of return could have been obtained on an investment made at the beginning of a calendar year for any given holding period of interest. But, that's not all - the folks at Crestmont Research have provided more data than they realize! 

If you follow the diagonals in the chart, which run from the upper left to the lower right, you can see what the S&P 500 rates of return are for given holding periods. If you follow the left-most diagonal, you will have 105 points of data showing what the S&P has historically returned for a one-year holding period. If you follow the black diagonal line on the chart, you can quickly see the 20-year long rates of return for the S&P 500. And if you take this pattern to the extreme, at the upper right corner of the chart, you will have one point of data showing the S&P 500 rate of return for the 105 year investment holding period!

First, don't try to read the numbers in the image below. Instead, treat it like a Magic Eye chart. Just look at the color pattern. You will note that the pockets of reds and greens along the center horizon reflect high- and low-return periods. In Bull's Eye Investing, the lower right-hand corner of the chart included only the first two columns of red. The addition of nine more columns makes it clear that this is a significant secular bear. Given current valuations and expected future returns, we're likely to see a lot more red columns before the secular bear ends. 

The observations from Bull's Eye Investing remain true today.

Quoting from the book by: Bull's Eye Investing by Ed Easterlink and John Maudlin

As we consider the story that the matrix begins to tell, several observations are initially apparent. There are clear patterns of returns relating to the secular bull and secular bear cycles. The periods of red and pink alternate with periods of blue and green. Once the new period starts, it tends to persist for long periods of time. Though the very long-term returns have been positive and near average, investment horizons of 10 years, 20 years, and even longer aren't long enough to ensure positive or acceptable returns.

Note also that we've recently completed the longest run of green years in the past century. Though we've had a couple of down (red) years lately, it has hardly helped to restore the long-term average to "average." We have quite a distance to go to complete what the mathematicians refer to as "regressing to the mean." As you look back over the past 100 years, there has never been a period where "the "red bear" stopped after a few short years and morphed into a "green bull."

Secondly, when you look at the "Taxpayer Nominal" chart, you will notice that the returns tend to be in the 5 to 7 percent range [only!] after long [again, repeat the word long several times] periods of time. Often nominal returns are 5 percent or less over multiple decades. Again, the charts clearly show the most important thing you can do to positively affect your long term returns is to begin investing in times of low P/E ratios.

Conclusion, a serious cyclical bear market 

Chapter six concluded with a summary section titled "What Does It Mean?" It was definitive. We did not pull our punches and did not hesitate to be specific about the environment in front of us. Low returns, slow growth, and declining P/Es – they have all happened, but they are not over.

The current P/E for the stock market is near the level where all previous secular bears started. Since the inflation rate did not diverge far from price stability over the past nine years, we made only minor progress on the P/E path toward lower levels. We have clearly been in secular-bear waters, nonetheless. This also means that our expectation of a "decade or more" of secular bear conditions was not overstated.  We concluded:

• For the past two chapters, we've considered statistical, cyclical, and fundamental reasons that stock market returns are likely to be less than average over the next decade or more. However, a sharper near-term retreat could hasten the next cycle. The confluence of factors that produced the historic secular bull market of the 1980s and 1990s is now positioned to leave few options for consistent near-term returns.
• What we are saying is that P/E ratios are going lower–potentially much lower than current ratios. This can happen by either the market moving sideways for a long period of time as earnings growth catches up or a drop in prices to where P/E ratios are consistent with a secular bear market cycle bottom.
• If inflation returns and interest rates rise, P/E ratios will trend downward. If deflation takes hold and economic malaise results, P/E ratios will also tend downward. Even if inflation and interest rates remain low and stable, the growth rate in the economy and earnings is likely to be below average, as we remain in the Muddle Through Economy for an extended period of time. This would mean that the market could move sideways for a considerable period of time waiting for earnings to catch up.
• In each of these instances, especially given the existing high P/E ratio of the stock market, returns from equities can be expected to be below average or negative for many years. This is consistent with the bull and bear secular market analysis detailed in the previous chapter. As well, the environment will be volatile and choppy, consistent with the profile of secular bear markets.

Sadly, the period of low or no returns is not likely to be over soon. P/E has a long way to decline before the end of this secular bear. We can get to the lower P/E ratios that typify the end of a secular bear market and the beginning of a secular bull market by either going sideways (with lots of volatility) for a long time, while earnings continue to rise, or we can see a serious collapse of the price of stocks in a short cyclical bear market. While we suspect the former is more likely, given the various crises afoot in the world and a US government that has the potential to not respond correctly, a serious cyclical bear market cannot be ruled out.

Either way, the next few years or perhaps the entire next decade will be frustrating for investors, as the market continues its rollercoaster ride to nowhere. And given the correlation between US markets and world markets, the coming period is likely to be frustrating in more places than just the US. But savvy investors with diversified and well-developed portfolios will not only ride out the storm, they are likely to achieve investment success. There will be winning stocks and strategies in even the worst bear markets. An emphasis on absolute returns and alternative investment portfolios will be rewarded. Hang on and prepare for interesting times.

* Let's take a moment to explain the layout of the chart. There are three columns of numbers down the left-hand side of the chart and three rows of numbers across the top of the chart. The column and row closest to the main chart reflect every year from 1900 through 2002. The column on the left side serves as our start year and the row on the top represents the ending year. The top row has been abbreviated to the last two numbers of the year, due to space constraints. Therefore, if you want to know the annual compounded return from 1950 to 1973, look for the row with the year 1950 on the left and look for the intersecting column labeled "73" (for 1973). The result on the version titled "Taxpayer Nominal" is 8, reflecting an annual compounded return of 8 percent over that 23-year period. Looking out another nine years, the return for 32 years drops to 6 percent after tax. (Note: Crestmont revised the Matrix to include lower transaction costs after 1975; thus, the updated Matrix reflects a 7-percent return for the 32 years). If we were to use "Taxpayer Real" for the same period, returns would drop to 2 percent. Also, there is a thin black diagonal line going from top right to lower left. This line shows you what the returns are 20 years after an initial investment. This will help you see what returns have been over the "long run" of 20 years.

Also note: the return number for the above example appears in a cell that is shaded light green. The color of the cell represents the level of the return. If the annual return is less than 0 percent, the cell is shaded red. When the return is between 0 percent and 3 percent, the shading is pink. Blue is used for the range 3 percent to 7 percent, light green when the returns are between 7 percent and 10 percent, and dark green for annual returns in excess of 10 percent. This enables us to look at the big picture. While long-term returns tend to be shaded blue, shorter-term periods use all of the colors.

Additionally, some of the numbers are presented in white, while others are black. If the P/E ratio for the ending year is higher than the P/E for the starting year – that is, if the P/E ratio was rising – the number is black. For falling P/E ratios, the color is white. In general, red and pink return cells most often have white numbers, and the greens and blues have black numbers. The P/E ratio for each year is presented along the left side and along the top of the chart.

This theme of rising and falling P/E ratios and the corresponding rise and fall of the stock market is one we are going to return to again and again. If you can understand this dynamic, you will be far ahead of most investors in the race to a comfortable retirement.

Finally, there is additional data included on the chart. On the left side of the chart, note the middle column of numbers. And across the top of the chart note the middle row. Both series represent the index values for each year. They are used to calculate the compounded return from the start year to the end year. Along the bottom of the chart, Crestmont included the index value, dividend yield, inflation (Consumer Price Index), real GDP, nominal GDP, and the 10-year annual compounded average for both GDP measures. For the index value, keep in mind that the S&P 500 Index value for each year represents the average across all trading days of the year.

Down the right side, there's an arbitrary list of developments for each of the past 103 years. In compiling the list of historical milestones, it was quite interesting to reflect upon the past century and recall that the gurus of the 1990s actually believed that we were in a "new economy" era. Looking at the historical events, it could be argued that almost every period had reason to be called a "new economy." But that's an argument for another day.

see the article : http://www.mauldineconomics.com/images/uploads/pdf/mwo070712.pdf

Market commentary

‘Dancing around the Fire of Hell.’ 

Byron Wien's close encounter. 

For years I’ve been telling you that the accumulation of debt was going to be the ending of the developed world and for years you have been telling me my views are too extreme. The problem is you are an optimist and I am a realist. You go around with a smile on your face thinking that there are serious problems facing us, but that everything will turn out favorably because the policy makers will do what they have to do to avoid disaster, and so far you have been right. The developed economies and their stock markets have plodded along and investors haven’t made or lost much money in spite of the challenges. At a certain point, however, the temporary measures that the policy makers put in place to avoid financial catastrophe prove insufficient and that’s where we are now. I’m not saying that it will happen tomorrow but events are falling into place that will take the smile off your face.

The Smartest Man is a Firedancer

When the New Democracy party in Greece defeated the anti-bailout Syriza, I was anxious to learn what The Smartest Man in Europe thought of it all.  The next day I flew across the Atlantic to meet him and we had a long discussion about the world financial outlook.  


Many of you remember The Smartest Man from earlier essays; I have been writing about him annually for more than a decade.  He has been a friend for thirty years, and during that period he has shown an almost uncanny ability to see major events affecting the financial markets before other observers.  Among these were the fall of Japan as an economic power in the 1980s, the economic changes in China and their significance the early 1990s, and the serious consequences of excessive borrowing in the developed world in the last decade.


His DNA endowed him with a certain amount of business acumen.  His ancestors operated canteens along the Silk Road, selling food, weather protection and supplies to travelers to India and China.  He apprenticed in finance in New York, but returned to Europe to take advantage of opportunities created during the post-war recovery there.  Along the way he has acquired the ABC’s of European wealth – an airplane, a Bentley and a house on a Cap in the French Riviera.  The depth and breadth of his art collection is impressive, but material things are not what gives him a high.  He gets his thrills from identifying a problem, thinking it through and being right in determining how it gets resolved. In his ninth decade, he is an inspiration to me.


He started out by saying he had done some preparation for our visit.  “I think the title of your essay should be ‘Dancing around the Fire of Hell.’  For years I’ve been telling you that the accumulation of debt was going to be the ending of the developed world and for years you have been telling me my views are too extreme.  The problem is you are an optimist and I am a realist.  You go around with a smile on your face thinking that there are serious problems facing us, but that everything will turn out favorably because the policy makers will do what they have to do to avoid disaster, and so far you have been right.  


The developed economies and their stock markets have plodded along and investors haven’t made or lost much money in spite of the challenges.  At a certain point, however, the temporary measures that the policy makers put in place to avoid financial catastrophe prove insufficient and that’s where we are now.  I’m not saying that it will happen tomorrow but events are falling into place that will take the 
smile off your face.


“The problem is that most investors think incrementally.  They don’t step back and look at the whole landscape, which includes how we got here and where we might end up.  In democracies the people always want the government to do more for them, but they don’t want to pay higher taxes.  Politicians get elected by promising benefits, not by raising the revenues necessary to avoid increasing debt.  In a developed economy real growth should equal the population increase plus productivity.  


For Europe and the United States that’s about 2%, but people there want their economies to grow more than that so the government provides the stimulus to create faster growth and takes on the debt necessary to do it.  Everything is fine as long as the cost of ten-year debt doesn’t exceed the nominal growth rate, but when it does the cost of servicing the debt becomes an unsustainable burden, and that’s where Spain and Italy are.  The United States isn’t quite there yet.
“When governments finally get around to recognizing they are in trouble, what do they do?  They accept the fact that they cannot produce more growth by providing fiscal stimulus because that would only increase the debt problem, and they can’t take the risk of a recession that might clean out the legacy debt obligations because that would prevent future borrowing, so they do the only thing they can do: they print money.  


That’s what the Federal Reserve did in 2008 when they increased the Fed balance sheet from $1 trillion, virtually all in the U.S. Treasurys, to $2.5 trillion, with the increase mostly in mortgage-backed securities.  That’s what the European Central Bank (ECB) did in 2011 when the sovereign debt problems of the weaker countries became severe.  The balance sheet of the ECB increased from €2.0 trillion to €3.0 trillion, and the increase was mostly made up of the sovereign debt of the weaker 
countries.


“This may go on for a while, but it can’t go on forever.  In Europe’s case Germany will stop backing the monetary expansion and the U.S. Fed will get uneasy as well.  As Milton Friedman persistently argued, inflation is always and everywhere a monetary phenomenon.  So far, however, inflation has remained tame because house prices and wages haven’t risen in most places in Europe and the United States (except real estate in London and New York, where foreign capital has flowed in).  At some point, however, inflation will become a factor.


“Right now we’re witnessing a kind of convergence.  The standard of living in the developed world is declining and the standard of living in the developing world is increasing.  Debt to Gross Domestic Product (GDP) ratios in the developed world are about 100%, where, as Ken Rogoff and Carmen Reinhart have pointed out in This Time Is Different, growth becomes modest.  In the developing world debt to GDP is only about 35%, so these countries have a long way to go.


“When you think about it, there are a lot more people producing things these days than there were thirty years ago.  Up until 1980 the United States was a major manufacturer and accounted for the dominant share of world GDP, about twice as much as it does now.  By 1980 Europe was producing goods for export and Japan was selling cars, cameras and consumer electronics to everyone.  Now China is the second largest economy in the world and is a major manufacturer, having come from nowhere in the 1970s.  With so many places producing so much and some doing it at relatively low cost, is it any wonder that a lot of people in higher labor cost areas like Europe and the United States are out of work?  The U.S. today is primarily a service economy with a trade deficit.  Germany is a manufacturing economy with a trade surplus.  Do you have to ask why one is doing well and the other isn’t?


“Going back to the Greek election, I think it will prove to be a non-event.  Antonis Samaras will agree to adhere to the austerity program the previous government signed in March in exchange for financial relief, but it will be hard for him to deliver as required.  The Greek people won’t tolerate the pain they will be forced to endure.  They are hot-blooded and want to see results quickly.  There are only two ways to solve the problems of the weaker countries:  austerity, which would mean a 10% contraction in GDP (and Greece is already doing worse than that) or default, which is the route that Russia and Argentina took to get back on track.  Ireland is a good example of a country that successfully took the austerity route.


“Before we experience widespread defaults the authorities will pull out every trick in the book to prevent catastrophe.  That’s because there is a general belief that the European Union was a good idea.  In order to compete against the United States and Asia, the European countries had to hang together.  It was as much a geopolitical decision as an economic one.  There needs to be more cooperation among the European leaders.  The first step is to create a coordinated banking system to prevent a run on the banks.  Deposit insurance won’t do the job.  It’s too much to expect the various governments to agree to a political union at this time, but there could be a banking union to prevent the European banking system from collapsing. 


“The next step will be for every central bank in the world to keep printing money.  Ultimately this will bring on a higher level of inflation, but I think the world is ready to accept that.  World leaders will agree that growth should be their objective and inflation will be the price they will have to pay for it.  This may result in some instability among currencies.  Before this happens there will have to be more suffering.  Spain and Greece will default.  There won’t be outright financial disaster because by the time the defaults take place the banks will have sold most of the troubled sovereign debt on their balance sheets to the European Central Bank.  France’s deficit will get worse as Hollande implements some of the programs he talked about in his campaign.  Human beings and governments have an unlimited imagination and they will use it to delay the day of reckoning.  In the longer term the crisis may turn out to be a good thing because the pain of what we are about to go through 
will prevent it from ever happening again.


“In the short term interest rates should keep rising because debt is increasing faster than GDP.  This should be true in the United States also, but capital is moving there for perceived safety reasons.  After the defaults occur, there will be slow growth.  The defaults will ultimately create a banking crisis, and that will result in a World Economic Conference where the leaders will agree on an objective of 7% nominal growth made up of the 2% real growth and 5% inflation.


“The Federal Reserve has to keep printing money to prevent a recession.  Europe is already in a recession and the ECB will keep printing money, but the Fed may be more aggressive and that could weaken the dollar further.  What we are experiencing is an accumulation of bad decisions.  The worldwide banking system was able to work together effectively to deal with the financial crisis of 2008 but hasn’t done so well since then.  The banks need more capital.  Their loans are being written down.  Their government bond holdings are declining in value.  On top of this, Basel III is imposing additional capital requirements.  How does that make sense?  It’s impossible.  I don’t know whether a default or an economic conference comes first, but in democracies, a crisis usually causes a conference.  In the meantime, capital in Europe will continue to flee to Germany, Finland and the Netherlands.




“So what am I doing with my money?  It is hard to hide in stocks.  Even Danone is reporting disappointing earnings; people are so worried they aren’t even buying yogurt.  The French auto companies are in trouble.  I think gold is going much higher.  I am buying energy stocks because I want to own something real.  Preserving capital is my focus now, not making money, but I like IBM and Apple.  Also some Swiss multi-nationals.  If Obama wins in November the market will go down.  A Romney victory will create a rally, but once he gets into office he will find there is not much he can do to make things better.


I left The Smartest Man’s office somewhat dazed.  My optimism was clearly diminished by what he had to say, but I still believe that somehow disaster has a way of usually not happening.  It seems clear that world leaders are going to do everything possible to avert a financial catastrophe and I think they have the resources to accomplish that goal.  It does seem, however, that the developed world has to resign itself to a prolonged period of slow growth.


*     *     *     *     *

Byron Wien, Vice Chairman, Blackstone Advisory Partners.

Investlogic Strategy Update as of July 1, 2012

Global Growth Outlook Weakens

Financial Review as of July 1, 2012

Little was expected from the EU summit, but quite a lot was actually delivered, although some follow-through will still be required if investors are to retain their newly found appetite for risk.

Analysts have generally argued that the euro’s survival depends on further integration of the eurozone economy, emphasizing the need for a banking union, a fiscal union and a political union. There was clear progress on the first and some on the second. And while there was no direct mention of the third, that becomes much easier once the first two are evolving satisfactorily. There was also a “nod” to growth. The main provisions were:

• A single bank supervisor for euro area (EA) banks headed by the ECB will be established by end 2012.  Following establishment of that single supervisor, the ESM can recapitalize EA banks directly—not via the sovereign—and impose only light conditionality.
• Financial assistance to Spanish banks will come from the EFSF until the ESM is established. Support from the ESM will not enjoy seniority status.
• Support to the Irish banks will be re-examined, presumably with an eye to placing it under the same framework as Spain, and other cases will be treated similarly.
• The leaders re-affirmed that the EFSF/ESM will be used to stabilize markets for member states through primary and secondary bond market purchases, but they did not agree to ECB funding for the ESM.
• The President of the European Council (Herman Van Rompuy) was tasked to develop a timed roadmap to further fiscal integration over the medium term. A first report should be published in October.
• A growth pact was agreed, comprised of more capital for the European Investment Bank, allocation of unused structural funds from the EU budget and project bonds for infrastructure development.

Equities: Everything changed on Friday. Equities traded choppily with a generally offered tone over the first four sessions of the week, then exploded to the upside in the last session. Italy and Spain soared 6.6% and 5.6%, respectively, on the day.

Bonds: The opposite was true for bonds. They traded choppily with a generally bid tone until giving up ground on Friday. Of course, there were a couple of exceptions. Italian and Spanish bonds rallied along with their equities.

Currencies: EUR/USD was offered through Thursday, but rallied over two big figures on Friday. 

Commodities: Gold and oil rallied sharply on Friday as concerns about Europe faded.

Investment Strategy 

The political and financial cost of an incoherent exit of the euro would be simply too high, and for Greece, and for other members of the euro area. If the politicians agree in understanding that they dispose of enough funding to keep Greece within the euro, they are as conscious that these funds wouldn't cover all the economic and political repercussions for the zone, hence the agreement to support it by new non-conventional measures of monetary policy by the European Central Bank and the new born European Stabilization Mecanism. Out of the euro area, it becomes visible that total economic recovery weakens. American growth weakened, but shouldn't slow down as noticed in 2011.

In emerging countries, after a recovery of equity markets since the lows of October, 2011, fed by a renew appetite for the risk of the investors, the rebound of the expected profits should carry the next movement of increase. From this perspective, it is the Chinese economy which remains decisive. The weaker growth of former quarters reflects the deep monetary tightening operated the last year to decelerate the activity of credit - quickly overturned when negative effets on small and medium sized enterprises became visible.

If Chinese economy continues however decelerating, a combination of measures of monetary expansion  and of a recovery stimuli plan including investments in infrastructures would lead to a recovery, supporting other emerging markets.

Equities Markets - include from now on the impact of a slowing or no growth seems to have reached a floor on the short term.. The risk premium is indeed at levels which would correspond to an stagnation of profits. Besides, the perspective of an expected coordinated  action by the central banks to lower  tensions on markets should constitute  a floor for actions, even if the timing of an intervention remains uncertain. In the States we are still in an election year which would also provides some supportive measures. The perspectives of the American economy growth, the robustness of the company profits  and the strength  of the dollar US should give some support to the US stock market. Conditions remain also positive for the emerging markets. 

On the Bond side, Corporate and High Yield always introduces welcome diversification and potential higher returns (see below). However,as long as it remains high uncertainties on the European crisis  and in the timing of a global  economic recovery, we are encouraged to protect us of turbulences by overweighting of German governmental bonds and some long-term US T-Bonds, as well as of course as an large part  gold.

Let's go Corporate 

Specifically, Grant is bearish on one of the very “safest” of safe things: highly rated government bonds. “The times may be troubled (they often are),” he says, “and people may be desperate (someone usually is), but that doesn’t mean that low-yielding sovereign debt is the last word in safety and soundness.”

Grant does not assert that top-tier government bonds are necessarily unsafe, merely that they are undesirable…and potentially unsafe. At current yields, many government bonds offer what Grant has termed, “return-free risk.”

As the nearby chart clearly shows, the yields provided by the marquee AAA government bonds of the US, Germany, Switzerland and the UK have been in a freefall for several years. As recently as four years ago, a 5-year bond from the Swiss government yielded about 3%. Today, the 5-year yield is negative! That’s right; an investor must pay the Swiss government for the privilege of lending it money.

The 5-year yields provided by the other AAA issuers in this chart are at least positive, but just barely. All of them yield less than one percent per year. Longer-term yields from these AAA-rated governments are similarly underwhelming.

Therefore, Grant suggests, rather than buying the 10-year German bund that yields a whopping 1.75%, why not buy the common stock of the German chemical giant, BASF, which is currently yielding about 4.3%?

“By the same token,” Grant continues, “we favor Wal-Mart over the 10-year Treasury, and Nestlé over the 10-year Swiss government note. Wal-Mart, which yields 2.4%, and Nestlé, which fetches 3.5%, have shown the ability to grow and adapt in economies both good and indifferent.”

Clearly, the shares out of BASF, Wal-Mart and Nestlé are not “safe” in the sense of providing a certain, government-guaranteed return. They are safe only in the sense of offering a potential return over time that greatly exceeds that of today’s ultra-low yielding sovereign bonds.

Furthermore, equities deliver returns that derive from real-world commerce, rather than from the increasingly dubious promise of a heavily indebted national treasury.

Emergent Markets: internal demand gives a relay for a more permanent growth

If in 2012 emergent equities overperformed, in some respects, of about 3 % the equities in developed countries, the last published figures mention one flat performance since the beginning of the year versus one light advantage to for the developed markets. However as in 2011, this visible under-performance comes out again mainly from a comparison with the American market. Due to the disappointing performances of the most part of Europe and to the weakness of the Japanese rally, the emerging markets continue nevertheless outperform the developed economies, except the United States, of about 3 %. 

As long as questions will persist if Greece is going  to stay in the euro area, risky assets should continue to underperform. This period of uncertainty should be of relatively short term and it could be wise to reinforce the exposure  on the emerging markets later in year. On the basis of the expected multiples (ratio lesson / benefit), equities stay on the whole attractive, but the  stronger growth in benefits within the emerging markets companies should be translated by the higher performances. 

The dynamics which drives the performance of the emerging markets however evolved. Two major topics focalized attention in the course of last decade: 1) the exports of raw materials towards China, 2) exports of consumer goods towards the developed world. The slowing down of the growth of China should weigh on the overall demand of raw materials from this country. Current debate does not limit itself to determine if China faces up a soft landing of its economy or in harder landing scénario. There remains that China still has  huge needs in infrastructures and even the assumption of a more modest growth rate - between 7 and 7,5 % - guarantees a strong demand for a lot of raw materials, particularly industrial metals. Countries and traditionally profitable firms of Chinese demand are going to continue to profit from it, but probably to a lesser extent.  

The accent should be put from now on more on the internal growth of the emerging markets rather than on the demand of of the developed world consumers, which should remain apathetic during several years. On the other side, many emerging countries achieved a level of development such as their internal demand is becoming a factor more and more contributing to  the growth of their GDP. If many investors are already aware of attraction that the Western luxury products have on these consumers, it concerns only a marginal part of the population. True opportunities will be in the consumer goods of lower range. This potential can be noticed in the over performance in equities of consumption goods sector which was 2,3 times superior to that the broad emerging market index since March, 2009, as well as in the performance of small capitalisations, more exposed to internal demand. The sector MSCI Small Cap advanced of 91 % over 3 years against 61 % for indication Broad Cap.

Imagining an end to the dollar’s reign

What is rarely questioned is why the dollar plays this role in the first place. And when you delve into it, it’s hard to come up with much more than self-fulfilling logic: The greenback enjoys this status because it always has. 

But against the blindingly obvious fact that our global financial system is broken, the empty foundations upon which the dollar sits could equally be brought into question. One day, the dollar’s role as the world’s reserve currency will end. It won’t happen overnight — the dollar is too deeply entrenched in the plumbing of international commerce and investing for that and there simply aren’t viable alternatives — but it will happen. 

Economic historian Barry Eichengreen, arguably the world’s leading expert on international monetary affairs, has argued that the dollar will lose its dominance within 10 years. The world needs to be ready for it.

For now, everyone still wants dollars. The greenback accounts for more than 80% of all foreign-exchange transactions, over half of all international trade invoices and two-thirds of central bank reserves.

In large part, the dollar’s appeal stems from the unrivaled depth and liquidity of America’s capital markets. But on many other levels, the U.S. is no longer the bastion of international financial security that it was. It is closing in on $16 trillion in debt, a figure larger than its GDP; it persistently runs twin fiscal and trade deficits; and its foreign currency reserves are barely enough to cover two weeks of imports. 

Meanwhile, other arguments for the dollar’s appeal such as the reliability of its legal system and respect for property rights are beginning to ring hollow when other countries’ judiciaries are equally trustworthy and when foreign investors harbor bitter memories of a financial crisis for which dysfunction on Wall Street and in Washington was to blame.

In fact, much of the dollar’s appeal simply lies in what is not. The euro has proven to be a disaster and the other oft-mentioned successor — the Chinese yuan — is the currency of an authoritarian regime whose love of capital controls prevents it from being easily traded offshore. Neither will be a viable alternative to the dollar for years, if not decades.

But for the dollar to lose its influence doesn’t require an alternative reserve currency to emerge. China and other big holders of dollars could simply stop building reserves. Or worse, they could repatriate those that they do hold, a prospect that rises the longer the U.S. fails to resolve its future debt problems. Already, China is developing alternative payment mechanisms that will allow a convenient go-around for nations wishing to trade commodities in currencies other than the dollar — Iran, for example, which would appreciate a means of avoiding sanctions. If there were to be a big enough withdrawal from dollar assets and dollar invoicing, the world monetary system could be thrust into the chaotic state of having no single, dominant currency as its anchor.

For now, it seems hard to imagine that the current state of play won’t be so forever. We remain smugly comforted by the notion that China, Japan and U.S. other big creditors wouldn’t want to upset a market in which they are so heavily invested. Yet such complacency is part of the problem. 

Demand for the dollar means that, despite its multiple flaws, the U.S. government can now borrow at a record low of 1.5% for 10 years. That means that the pricing mechanism, the one with which markets normally impose discipline on debtors, isn’t working. The problem is that this state of blissful isolation from market realities can quickly disappear. Just talk to a Greek citizen.

The U.S. is dangerously addicted to the drug of cheap dollars. Meanwhile, other countries increasingly feel vulnerable to the market volatility that comes with America’s sometime reckless use of the dollar’s dominance. The dollar’s global status means that whenever the Federal Reserve turns to the printing presses — as it will likely do again in another futile bid to fight America’s economic malaise — those freshly minted dollars flow into commodity markets and the currencies of emerging markets. That complicates policy-making in those countries, the same ones that happen to be the biggest holders of dollar reserves and thus the ones with the power to demand change.

For more than half a century, the dollar’s reserve status has assured the U.S. of a prodigious flow of cheap financing. It has bankrolled the most powerful military machine in history and facilitated the rich material existence of its people. But the world won’t forever allow it to enjoy what former French President Valerie Giscard D’Estaing described as America’s “exorbitant privilege.”

It behooves U.S. policy makers to start considering a multilateral alternative to the dollar. An International Monetary Fund-sponsored reserve unit is often floated as one idea — one that currently faces various obstacles but that could be resolved through a well-designed treaty.

But at some point they will need to be part of the national discourse. It is far better for the U.S. to plan an orderly exit from dollar dependence than to have the rest of the world force it into a disorderly one.