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Words from the (Investment) Wise for the Week That Was (November 16 - 22, 2009): Part II

Bill King (The King Report): Getting more bearish on US economy
"Goldie's Jan Hatzius is getting more bearish on the economy by the day.

"'Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand - net of the boost from fiscal policy - is still contracting at an annual rate of around 1% in the second half of 2009. Although we expect a moderate recovery of around 2% by the second half of 2010, such a 3-percentage-point improvement would be insufficient to offset the loss of 4-5 percentage points of stimulus from fiscal policy and the inventory cycle. Hence, real GDP growth is likely to slow anew to a below-trend pace.

"'The significantly stronger recovery that is now anticipated by a number of forecasters would require a much sharper acceleration in underlying final demand, along the lines of prior recoveries from deep recessions. But this ignores some key differences between the current situation and the aftermath of prior slumps. In particular, bank credit is tighter, the personal saving rate is much lower, the labor market is less cyclical, there is much more excess housing supply, and state and local budget gaps are deeper.'"

Source: Bill King, The King Report, November 17, 2009.

Asha Bangalore (Northern Trust): Leading Economic Index underscores US economy will continue to grow
"The Conference Board's Index of Leading Economic Indicators rose 0.3% in October, after a 1.0% increase in the prior month. On a year-to-year basis, the leading index moved up 4.7% in the fourth quarter of 2009 (based on October data). The year-to-year change in the leading index has held in the positive territory for two consecutive quarters. The historical record of the leading index supports expectations of continued growth of real GDP in the near term.

"In October, six of the ten components of the leading index advanced - average manufacturing workweek, stock prices, interest rate spread, jobless claims, real money supply and orders of durable consumer goods. The remaining four components - orders on non-defense capital goods, vendor deliveries, building permits and consumer expectations - fell in October."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 19, 2009.

Asha Bangalore (Northern Trust): Factory production slips in October
"Industrial production inched up 0.1% in October mainly due to a 1.6% increase in production at the nation's utilities. Utilities and mining (-0.2%) components make up a small part of the total industrial production. Excluding these components, factory production slipped 0.1% in October after posting strong gains for three consecutive months.

"The weakness was in the durable goods component (-0.4%), while production of non-durable posted a small increase. Within durables, the gain in primary metals (+3.6%) was more than offset by declines in autos (-1.6%), furniture (-1.9%), electrical equipment (-0.9%) and computer and electronic products (-0.3%). Stepping back from these details, the small decline in factory production is not a severe setback. The process of recovery will be marked with some monthly readings showing declines. More importantly, the projected trajectory of factory activity in the coming months is positive.

"The operating rate of the nation's industries moved up to 70.7% in October from 70.5% in the prior month. The capacity utilization rate of the factory sector held steady at 67.6% in October, which is noticeably higher than the 65.1% record low mark of June 2009."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 17, 2009.

Asha Bangalore (Northern Trust): Labor market data point to stabilizing conditions
"Initial jobless claims held steady at 505,000 during the week ended November 14. Continuing claims, which lag initial claims by one week, declined 39,000 to 5.611 million. The insured unemployment rate held steady at 4.3%.

"Total claims which include recipients under the special programs, Extended Benefits Program and Emergency Unemployment Compensation Program, were 9.81 million during the week ended October 31, down from 10 million during the week ended October 3. Total continuing claims have held below 10 million for four straight weeks implying that although hiring is not advancing, job losses have stabilized."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 19, 2009.

Clusterstock: The hires-and-fires gap brings good news for job seekers
"The unemployment rate is still miserable, but it's not entirely bad news - at least if you find clever ways of slicing and dicing the data.

"Today's chart measures the percentage difference between new hires and separations (people leaving a job). As you can see, the gap yawned late last year, as way more people left the workforce than were hired. But it's coming back, getting closer to the 0% mark (even). And then of course, we just need to create a lot of jobs."

Source: Vince Veneziani and Kamelia Angelova, Clusterstock - The Business Insider, November 16, 2009.

Asha Bangalore (Northern Trust): Housing starts - permits show a more stable trend
"Total housing starts fell 10.6% to an annual rate of 529,000, the lowest since April. The 35% plunge in construction of apartment building to a new record low of 53,000 units brought down the overall reading. The 6.9% drop in single-family starts to 476,000 is the lowest since May. Uncertainty about the extension of the $8,000 tax credit for first-time home buyers is seen as one of the reasons for the weakness in home construction. If this is accurate, a rebound is likely in November because the tax credit program has been extended to April 2010."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 18, 2009

Asha Bangalore (Northern Trust): October retail sales - noteworthy gains of several components
"Retail sales rose 1.4% in October, after downward revisions of retail sales in September (-2.3% vs. earlier estimate of -1.5%). The downward revision of retail sales in September combined with the widening of the trade deficit in September implies a lower estimate of third quarter real GDP (+3.5%).

"In October, retail sales excluding building materials (part of residential investment expenditure in GDP), autos (unit sales are consistent with auto spending component of consumer spending in GDP) and gasoline (excluded due to volatility of prices) advanced 0.5% after strong readings in August and September. In addition, retail sales excluding, building materials, autos, and gasoline rose 1.4% in October, the first year-to-year gain since October 2008. The main point is that consumer spending is recovering gradually."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 16, 2009.

Bill King (The King Report): Sharp contraction in consumer credit
"John Williams: 'As shown in the following graph, consumer credit outstanding fell at a 4.8% annualized rate, the deepest annual decline of the post-World War II era:

"'The year-to-year contraction in September commercial and industrial (C&I) loans also set a post-World War II record decline, and October's drop will be even worse. Based on 28 days of reporting, October C&I loans fell by about 16.2% year-to-year, following annual contractions of 10.6% in September and 7.1% in August.'"

Source: Bill King, The King Report, November 16, 2009.

Asha Bangalore (Northern Trust): Higher prices for cars and energy lifted CPI in October
"The Consumer Price Index (CPI) rose 0.3% in October after a 0.2% increase in the prior month. The details of the October CPI report indicate that higher prices for cars and energy were the predominant gains. The energy price index moved up 1.5% in October, with higher gasoline prices accounting for a large part of the increase. Food prices inched up only 0.1% following a 0.1% decline in the prior month. Year-to-date the CPI has risen at annual rate of 2.7% and from a year ago it fell 0.2%.

"The core CPI, which excludes food and energy, increased 0.2% in October. According to the BLS, higher prices for used and new cars and light trucks were responsible for 90% of the increase in the core CPI. Given the soft demand for cars and shaky balance sheets of households, it is unlikely that higher prices will stick in the months ahead.

"From a year ago, the core CPI increased 1.7% and is inching closer to the Fed's threshold of tolerance (2.0%). However, the concentration of the gains in prices among two components - energy and autos - suggests that we need to wait for more evidence before we can confirm that inflation is problematic. Inflation will continue to rank low among the Fed's priorities compared with economic growth and financial stability in the near term."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 18, 2009.

MoneyNews: Sprott - hyperinflation on the way
"Eric Sprott, CEO of Sprott Asset Management, says quantitative easing is 'just debasing the currency, which will eventually lead to hyperinflation'.

"The recent extension of the homeowner credit and giving corporations loss carry-backs while paying unemployment benefits for an additional 20 weeks, augur an inflationary if not a hyperinflationary scenario, Sprott notes.

"'I really think that once the Fed has spent the $1.25 trillion buying the GSE paper that we might yet see another level of quantitative easing in the States,' he says.

"Sprott does see one upside for investors, though: 'You can just feel the momentum in gold - it's picking up dramatically' and so too are prospects for a plethora of little-known small and mid-cap gold stocks.

"'There aren't too many choices when you're in debt to the level that the US government is,' Sprott told The Gold Report.

"'One way of calculating it says there's $72 trillion of debt and another way suggests it is $100 trillion. It's almost academic which calculation you use; it's just an overwhelmingly serious problem ... it certainly seems that (the Obama administration) is going to try to spend their way out of it,' Sprott says."

Source: Julie Crawshaw, MoneyNews, November 19, 2009.

Clusterstock: An inflation warning sign
"In a speech on Monday, Federal Reserve chairman Ben Bernanke said he did not see inflationary threats on the horizon.

"Perhaps that is because he's looking in the wrong place. The prices of crude goods, those in the earliest stages of production, have been inflating for most of the year. The willingness to pay more for crude goods probably indicates that businesses are predicting selling finished goods at higher prices. In other words, this is a strong indicator of inflationary expectations."

Source: John Carney and Kamelia Angelova, Clusterstock - The Business Insider, November 17, 2009.

Financial Times: "Sweet spot" of low interest rates
"Treasury bonds look to be pricing in a 'sweet spot' of exceptionally low interest rates and benign inflation - but yields are likely to rise sharply next year, says Manoj Pradhan, global fixed income economist at Morgan Stanley.

"'Our proprietary model puts the current fair value for 10-year Treasury bond yields at 3.3% - bang in line with actual yields,' he says.

"But Mr Pradhan warns that significant uncertainty still surrounds inflation expectations. 'It is hard to find investors who believe inflation over the medium to long run will be precisely in line with central bank targets.

"'And even if you believe that inflation will play fair, investors seem to be receiving no compensation for the macroeconomic risks that have surely made an indelible impression over the past two years, or for the fiscal risks that abound.'

"Furthermore, Mr Pradhan says, the sanguine expectations in the US Treasury market have put pressure on yields elsewhere, making it difficult for early-hiking central banks to find policy traction through higher bond yields.

"'We expect US 10-year yields to rise to 5.5% by the end of 2010 - an increase of 220 basis points that outstrips the 137 basis-point increase in the Fed funds rate expected over the same horizon. This bear steepening of the curve in 2010 may well be preceded by slightly lower 10-year yields in 2009.'"

Source: Manoj Pradhan, Financial Times, November 19, 2009.

BCA Research: Regional fixed income - allocation in a changing policy environment
"In some developed countries, a new interest rate cycle is underway. This development will be the main factor driving relative bond yields for the foreseeable future.

"In countries where the effects of the credit crunch were less severe, central bankers are becoming more confident that their economies are on solid footing. In some instances, policymakers have opted to begin renormalizing interest rates, while others are openly discussing 'exit' strategies. Correspondingly, the opportunities that will present in the government bond market in the coming months will take advantage of the relative timing and speed of this process. Monetary policy will tighten fastest in those countries where the recession was mildest (like in Australia) or where the boost to growth from resource-related prices is highest (as is the case in Norway).

"Our global fixed income strategists expect commodity-country bonds to continue to underperform. In contrast, the euro area and Japanese bond markets will outperform as their respective central banks have the most flexibility to stay on hold for the foreseeable future. The Fed will also remain on hold for an extended period, although a poor valuation starting point and increased debt issuance will act as a weight on Treasurys."

Source: BCA Research, November 20, 2009.

Financial Times: Corporate bonds - all good things come to an end
"Credit markets are likely to offer lower returns in 2010 - although heightened volatility and increased supply should ensure an interesting year, says Stephen Dulake, head of credit research at JPMorgan.

"He notes that 2009 was a year when you could buy high-quality corporate debt and achieve equity-like returns. 'However, all good things come to an end and next year we forecast high grade returns of around 3%, and coupon-like 7-8% returns for high yield.'

"But Mr Dulake says that low return does not necessarily equate to low volatility. 'For example, we see the potential for risk markets to swing from pillar to post as investors oscillate from fearing deflation to fearing inflation,' he says.

"He also argues that supply is likely to be greater than many expect.

"'Our analysis suggests we could see investment grade companies issue €200 billion of bonds in 2010. This is double the average of the past decade and is a direct consequence of the sea-change in corporate liability management of the past 12-18 months. We expect this shift away from loans and toward bonds to be a multi-year process.

"'Furthermore, a meaningful pick-up in merger and acquisition activity could also lead to an increase in supply.

"'In high yield, we expect issuance of €35 billion in 2010, which would represent a record year and would in part be driven by leveraged corporates refinancing loans.'"

Source: Stephen Dulake, Financial Times, November 17, 2009.

Bespoke: YTD sector performance
"One would think that in a year where the average stock in the S&P 500 is outperforming the index by a wide margin (40.3% vs 22.9%), that most sectors would also be outperforming the overall index. Yet with the S&P 500 trading to a new high for the year, only three out of ten sectors are actually outperforming the index in 2009. Through this morning, Technology (55.1%), Materials (43.5%), and Consumer Discretionary (36.5%) are the three best performing sectors this year, while Telecom Services (-4.1%), Utilities (1.6%), and Consumer Staples (12.7%) have lagged the most."

Source: Bespoke, November 16, 2009.

MoneyNews: Whitney - more bearish now than in a year
"Meredith Whitney says she hasn't been as bearish as she is now in a year.

"'I look at the board, and every stock from Tiffany to Bank of America to Caterpillar is up,' Whitney told CNBC.

"'But there's no fundamental rooting for why these names are up, particularly in the consumer space.'

"Moreover, Whitney says she has never seen so much consumer credit contraction.

"'You didn't see this much even in the Great Depression,' she says.

"'$1.5 trillion in credit cards has been pulled from the system.'

"'There's nowhere to hide at this point.'

"Whitney expects banks will do another round of capital raising because the sector is inadequately capitalized at present and foresees 'another leg down' in the residential real estate market when mortgage rates and prices begin moving lower.

"Whitney still sees a much bigger risk related to residential mortgage exposure, rather than commercial, and advises investors to sit on their cash for a while because everything's too expensive right now.

"However, though she expects a double-dip recession, Whitney says the second half of the 'W' will not be as severe."

Source: Julie Crawshaw, MoneyNews, November 18, 2009.

Bloomberg: Mobius expects 40% BRIC stocks gain, says buy on dips
"Mark Mobius said stocks in Brazil, Russia, India and China are likely to rise by 30 to 40 percent within three to four years as higher economic growth and lower government debt spurs corporate earnings.

"Mobius, chairman of Templeton Asset Management Ltd., said he's increasing holdings in all emerging markets, with particular focus on the four biggest developing-nation economies collectively known as the BRICs.

"'BRIC countries are really at the top' of our favorite holdings, Mobius, who oversees about $25 billion of emerging-market assets, said in an interview at the sidelines of a press conference in Istanbul today. 'You can see BRIC countries have been best performing.'

"Russia's RTS Index has surged 135 percent this year, the biggest gainer among 89 equity gauges worldwide, and Brazil, China and India rallied more than 75 percent as the global economic recovery spurred demand for commodity exports. While developed countries may shrink 4 percent this year, emerging markets as a whole may avoid a contraction with zero change in gross domestic product, Mobius said.

"While a 'sudden violent correction' is likely in a bull market, investors should be 'ready to buy', Mobius told reporters.

"The biggest growth areas in emerging markets are in the consumer and commodity industries, with China and Brazil offering among the cheapest stocks worldwide, Mobius said."

"The MSCI gauge of 22 developing countries is valued at 20 times reported earnings, according to data compiled by Bloomberg. The MSCI China Index trades at 17.7 times profit, while the MSCI Brazil Index is valued at 18.2 times earnings. That compares with a price-earnings multiple of about 30 for the MSCI All Country gauge of developed and emerging economies. The S&P 500 is valued at 22 times profit of the companies in the index."

Source: Seda Sezer and Tian Huang, Bloomberg, November 18, 2009.

Bespoke: Checkup on China and the Baltic Dry
"China's Shanghai Composite stumbled significantly during the late summer, but it has come back nicely with a gain of 24.5% off of its lows at the end of September. While its rally has been impressive, Shanghai has yet to take out its 2009 highs made in early August. At the same time, the cost to ship goods as measured by the Baltic Dry Index has increased 115% since its lows in September and has made a new 2009 high. Traders like to relate the Baltic Dry Index to how things are going in China, so with the Baltic Dry charging to new highs, will the Shanghai Composite follow?"

Source: Bespoke, November 19, 2009.

Times Online: Dollar carry trade could herald the next global crisis, analysts warn
"The global economy could be poised for the creation of a potentially explosive dollar carry trade, analysts said yesterday.

"The trade allows investors to borrow dollars at near-zero interest rates, which they use to fund asset-buying sprees around the world, and has been possible since the collapse of Lehman Brothers last year and the extreme monetary response to its aftermath.

"The warning was issued at the Apec summit of Asia Pacific leaders in Singapore and came after a variety of assets started to display bubble-like patterns of inflation: everything from gold and copper to fine wine and Hong Kong penthouses.

"As the carry trade grows more popular it could add more downward pressure to the already falling dollar, particularly if the 'carried' - borrowed - dollars are immediately sold to buy non-dollar denominated assets in China or Singapore.

"Analysts believe that it was the sudden unwinding of the yen carry trade - immense pockets of investment funded by cheaply borrowed yen - that sent the destructive ripples of the Wall Street crisis around the world last autumn.

"Carry trades, which essentially mean borrowing at low rates to fund higher return assets, make sense until markets turn sour and exchange rates shift too violently. At that point, the rush for the exit wildly exacerbates any crash. A collapse of the dollar carry trade has the potential to be particularly harmful because of its scale.

"While a few prominent financial figures have already warned of the threat of an emerging dollar carry trade, governments have steered clear of commenting on the issue until now.

"But talking on the sidelines of the Asia Pacific summit, Donald Tsang, chief executive of Hong Kong, admitted openly that the dollar carry trade had started to spread and that the prospect 'scared' him."

Source: Leo Lewis, Timesonline.co.uk, November 14, 2009.

The Wall Street Journal: It's time to get dollar bullish
"After a dramatic decline in the USbcurrency, investors should consider going long the dollar via an ETF, says Barrons.com's Bob O'Brien."

Source: The Wall Street Journal, November 18, 2009.

Financial Times: IMF chief urges stronger renminbi for global balance
"A stronger Chinese renminbi is part of the reforms that Beijing needs to implement to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.

"Dominique Strauss-Kahn, managing director of the IMF, said the countries at the heart of global imbalances needed to take various measures to ease them.

"In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Mr Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

"'A stronger currency is part of the package of necessary reforms,' he said. 'Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.'

"Mr Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.

"'But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms,' he said.

"Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority, he said.

"Overall, the global economy appears to have turned a corner, Mr Strauss-Kahn said, but the biggest risk to the outlook is a premature withdrawal of policy stimulus."

Source: Financial Times, November 16, 2009.

BCA Research: Asian currencies - near-term risks, but structurally sound
"There are strong long-term trends supporting further appreciation in Asian currencies, although a near-term pullback is likely if Chinese authorities do not allow the renminbi to appreciate. Valuations vary, but these currencies tend to be inexpensive.

"The real effective exchange rates of many Asian currencies have been quite subdued. Similarly, in nominal trade-weighted terms, many Asian currencies have not yet appreciated much over the past decade. As a result, from a 'fair value' perspective the Chinese RMB, the Korean won and the Taiwanese dollar currently look cheap, while the Singapore dollar is slightly expensive.

"Meanwhile, from a structural viewpoint, Asian currencies are being supported by the following trends: robust productivity gains, firming domestic demand, rising relative returns on capital, solid fiscal positions and widening trade surpluses with China. However, a major concern is that weak export prices will cause a pullback in EM currencies in the near-term. A large divergence has emerged between Asian export prices and appreciating regional currencies. This divergence will cap currency rallies in Asia, if China keeps the RMB at current levels.

"Our EM team concludes that on a long-term perspective, Asian currencies will benefit from decent valuations and structural backdrops but are at risk in the near-term. Stay tuned."

Source: BCA Research, November 17, 2009.

Bespoke: Gold closing in on 20% above 200-day moving average
"Gold's move over the past couple of months has been pretty incredible but not without precedent. As shown in the first chart below, the most recent leg up for gold has put it at 19% above its 200-day moving average. In the second chart, we highlight the historical 200-day moving average spread for gold. As recently as 2006 and 2008, the 200-day spread moved well above 25%, and back in 1980, the spread briefly got up to 136%! Gold is definitely overbought right now, enough so that the risk/reward tradeoff in the short-term is probably favoring the risk side. However, it has gotten much more overbought in the past than it is now, so it could still go higher before correcting."

Source: Bespoke, November 18, 2009.

Richard Russell (Dow Theory Letters): Gold bull market - great persistency
"I think the most interesting action in the current picture is the action of gold. I get the feeling of a ground swell, some irresistible force that is driving gold higher. What's interesting is that there are no wild spikes in gold, no fireworks, but a steady, persistent climb. This is powerful bull market action, and where it comes from nobody really knows. Is this the buying of millions of Chinese? Or is it the late-entrance of US hedge funds? Or is it short-covering on the part of squeezed COMEX speculators.

"In the end, does it matter who's doing the buying? I know this - most Americans have been brain-washed after may years of anti-gold propaganda. Most Americans don't know anything about gold. Most Americans have not been buying gold. Most Americans don't realize that gold is the time-honored ultimate form of money. So the buying is probably coming from some place other than the US populace.

"So far the gold action is coming in via almost measured increases of 3 to 10 dollars a day. It's as if the buyers are waiting for a correction, and when no correction arrives, they say 'What the heck' and they buy a quantity of gold, maybe not as much as they'd like, because they keep waiting for that elusive correction."

Source: Richard Russell, Dow Theory Letters, November 18, 2009.

Richard Russell (Dow Theory Letters): The case for gold
"I like to keep it simple, and I like to understand the fundamentals. So here goes. The Fed and the other central banks can create 'money' out of thin air. By now, everybody on earth knows that. People also figure that if it's an item that can be created without work and through an accounting entry, it can't be real money, rather it's simply a brand of 'Monopoly money'.

"OK, then how about this? You can take the phoney money that the Fed creates and you can actually buy something real with it. That 'real something' can be gold or it can be a foreclosed home or it can be top-grade stocks like the thirty stocks that make up the Dow. Trade Fed-created junk for something real? Why not, it certainly makes a lot of sense.

"But there's something else. Sophisticated investors are beginning to distrust ALL fiat or central bank-created 'money'. Moreover, they distrust a situation where central banks all over the world are creating huge additional amounts of their phoney money. Knowledgeable investors are starting to place all fiat money into a single class. And they distrust that class. They distrust it because they think of it as 'junk money gone wild'. Their reaction - turn in your junk money for the one type of intrinsic money that has represented wealth for 6000 years - gold.

"I've written many times that gold seems to be imbedded into the DNA of mankind. Today, with the world in turmoil, rich men may be saying to themselves, 'I don't know what's going on any more, and frankly, I don't know where I'll be in ten years. But if I own a thousand ounces of gold, I'll know I'm rich. I don't know what the price of gold will be when this whole mess is over, but I know I'll still be wealthy if I own a thousand ounces of gold.' And that, to my mind, is some of the thinking behind the rising price of gold and maybe even of stocks."

Source: Richard Russell, Dow Theory Letters, November 17, 2009.

The Wall Street Journal: John Paulson making big new bet on gold
"One of the biggest investors is placing a huge new bet on gold.

"John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.

"Mr. Paulson told his investors he personally would invest between $200 million and $250 million in the new fund, which he said will begin on January 1, according to an investor at the meeting.

"Paulson & Co. already is a major holder of gold shares including AngloGold Ashanti and Kinross Gold, doing most of its buying early this year. Mr. Paulson currently has more than 10% of his $30 billion or so under management in gold-related investments, according to his investors. The moves have benefited from the recent surge in gold prices to nearly $1,150 an ounce.

"The gold fund will invest in gold-related shares and gold derivatives and will aim to outperform gold prices.

"Mr. Paulson noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

"While harmful inflation isn't on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That's because in the past there's been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises."

Source: Gregory Zuckerman, The Wall Street Journal, November 19, 2009.

Clusterstock: How the old gold bugs lost control of gold
"Latest data from the World Gold Council shows just how much the gold market has changed in just under two years. Essentially, the more traditional sources of demand for gold, i.e. jewelry, industry, gold bar hoarders, and coins have been falling.

"Meanwhile, gold demand from new retail investment products has skyrocketed from just 7% of total gold demand in 2007 to a whopping 27% most recently. That's almost a 4x increase in their share of demand in under two years. Given that market prices are generally driven by incremental changes in supply and demand, clearly the new retail style gold players are now driving the market.

"The true gold bugs of yesteryear are no longer in charge. Though they're probably not complaining given that retail demand is making them rich. Just realize that retail demand can be a fickle friend."

Source: Vincent Fernando and Kamelia Angelova, Clusterstock - The Business Insider, November 19, 2009.

Financial Times: Global recovery threatens food price surge
"Conditions are ripe for a fresh surge in food prices as the global economy recovers, says the senior United Nations agriculture official.

"Jacques Diouf, director-general of the UN's Food and Agriculture Organisation (FAO), believes that the world is not doing enough to avert another food crisis. His warning comes as leaders are expected to gather in Rome on Monday for the World Food Summit .

"'When the recovery picks up, we will be back to square one,' Mr Diouf told the Financial Times in an interview.

"He said the same structural problems behind last year's spike in food prices were still affecting the market. These included lack of investment, surging demand in Asia and diversion of food commodities into biofuels.

"'We have all the elements of the crisis,' he said, adding that a weakening US dollar could exacerbate the upward price pressure in food commodities.

"Although the prices of some commodities, such as wheat and rice, have halved since their peak in mid-2008 because farmers in rich countries have expanded their output, they remain well above the pre-crisis level and near record levels in poor countries.

"Other food raw materials - particularly the so-called breakfast commodities such as cocoa, sugar and tea - are now trading at their highest level for about 30 years.

"Mr Diouf's warning came as global food companies urged policymakers to strive for regulatory transparency and a boost in infrastructure spending to tackle the food crisis."

Source: Javier Blas and Vincent Boland, Financial Times, November 15, 2009.

Financial Times: Fears of China property bubble
"A large bubble is forming in China's property market as a result of Beijing's credit-driven stimulus programme, one of the country's most prominent real estate developers warned.

"Zhang Xin, chief executive of Soho China, one of the country's most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country's long-term growth prospects.

"'Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,' Ms Zhang said. 'The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.'

"Ms Zhang's assessment was echoed by Fan Gang, a member of the central bank's monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

"Urban property prices in 70 big and medium-sized Chinese cities rose 3.9% in October from a year earlier, accelerating from September's 2.8% rise, according to government figures.

"Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

"'In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,' Ms Zhang said.

"'If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn't be so optimistic.'"

Source: Jamil Anderlini, Financial Times, November 18, 2009.

Financial Times: Pace of growth picks up in Japan
"Japanese gross domestic product grew 1.2 per cent quarter-on-quarter between July and September, as stimulus-fuelled consumer spending joined a growing trade surplus to help the world's second-largest economy continue its climb out of its sharpest postwar recession.

"Monday's preliminary data showed growth at its fastest in over two years and left little doubt the worst is over for an economy battered by collapsing external demand after last year's financial crisis.

"The pace of third-quarter growth was equivalent to 4.8 per cent on an annualised basis, compared with the 2.6 per cent forecast by economists in a Kyodo News survey. However, Japan's economy was still 4.4 per cent smaller than in the same quarter of 2008, showing how far it still has to go to make up the damage inflicted by global woes last winter.

"With stimulus programmes such as car subsidies due to expire and the temporary process of inventory restocking also a big contributor to GDP growth, many economists remain downbeat on prospects for the first half of 2010.

"'It is difficult to interpret the Q3 inventory build-up as supportive of further strong growth in production,' wrote Chiwoong Lee, economist at Goldman Sachs in a research note.

"Economists said worries about fragility in consumer sentiment meant Japan was likely to remain dependent in the near-term on the strength of export markets such as China."

Source: Mure Dickie and Robin Harding, Financial Times, November 16, 2009.

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