Global Turmoil and the Federal Reserve

Many people often remark to me as to why I bother writing about the Federal Reserve and its monetary policies. After all, its policies don't really effect people in the world away from the financial markets.

But it does...in a big way.

The head of the Federal Reserve Ben Bernanke is the leading general in the global currency war. He has resorted to never-before-seen levels of printing dollars. Why?

There are two main reasons: the first is to bail out the big Wall Street banks from the disastrous and reckless decisions they made over the past decade.

The second reason is to force China to revalue their currency upward to supposedly make US industries more competitive.

It doesn't take a forensic accountant  to know that when you indiscriminately "carpetbomb" the world with bombs filled with US dollars, there is bound to be "collateral damage".


The Fed and Geopolitics


Somwhow money bombs Mr. Bernanke aimed at China ended up landing in the Middle East and North Africa, blowing up regimes there.

The Fed's printing of trillions of dollars has led to inflation all over the globe. It has been one of the key factors pushing up the price of much-needed commodities.

Basic necessities such as food and fuel have risen sharply since the Fed began its quantitative easing or money printing. Especially in some of the poorer emerging markets.

In many cases, this has led to food riots. For some reason, hungry people seem to be ill-tempered and have no stomach for the empty promises of politicians.

On January 14, 2011, Tunisian president Zine al-Abidine Ben Ali was driven out by popular revolt. He had been in power for 23 years, but rising food prices were the last straw for the people of Tunisia.

Right now, we are seeing a similar uprising in Egypt. Rising prices for the basic necessities of life are leading to an uprising against Egyptian president Mubarak, who has been in power since 1981.

The regime change in Tunisia and the possible one in Egypt is sending shudders throughout the leaders in that region.

Of course, any turmoil in that region of the world will send oil prices higher. So besides Ben Bernanke's dollar debasment raising the price of oil, now we have geopolitics, largely thanks to the Federal Reserve, also raising oil prices.


The Fed's Policies Are Bad


Even if regime changes bring about "democratic" governments, these governments will most likely not be friendly to the United States.

It does not help that the United States firmly supported autocratic regimes such as in Egypt.

But thanks to the internet, blogs and other technology, people around the world have a better understanding of what is going on around them.

US economic policies are not popular anywhere in the globe. Even allies in Europe and Japan are highly critical of the Federal Reserve.

Even more important for the long term, big important emerging market countries including China, India, Brazil, Russia, Indonesia and others are highly critical of US monetary policies.

Now we can add countries from Africa and the Middle East to the list of countries which feel that the US pushing its problems on to the rest of the globe and making other people suffer.

People around the globe now know that the Fed's mometary policies are pushing up the cost of living to all of their citizens. And to what end? So Wall Street firms can keep getting paying out million dollar bonuses?

If this keeps up, the US will be left without a friend in the globe. Thanks, Mr. Bernanke.

Should You Buy Gold?

Sometimes I begin to think that the price of gold can't go any higher. After all, it has enjoyed ten straight years of gains and has quadrupled in price. Gold has done this in a decade where the S&P 500 has basically done nothing.

But after reading an article in the recent Money Magazine, my faith in gold as a contrarian and profitable investment is restored.

After reading the article I once again realize that the mainstream financial press, largely controlled by Wall Street, still despises gold. And it is still loathed by most so-called investment professionals...especially as it goes higher every year.

Why is gold so hated? It's simple. Wall Street banks and the people who work in the financial industry cannot make money from gold.

After all, there is not much money to be made if the retail investor buys gold in whatever form (bullion, coins, stocks or funds) one time and salts it away for years.

Wall Street needs the suckers (the average investor) to keep buying and selling hot stocks like Apple for them to make money.


Gold Is Not a Bubble


The Money magazine article used the term to described gold that Wall Street always does - a "bubble". Like last year's article on gold, it said to dump gold. To me, the article once again proved that Money knows nothing about money.

By the way, the person who wrote this article also wrote an article in early 2008 about how then was a great time to buy a house and make a ton of money. In other words, clueless!

One reason cited by Money for not buying gold is that pop culture has started paying attention to gold. When pop culture gets excited about an asset class - like tech stocks in 1999 or housing in 2006 - you know it's late in a roaring party.

But Money missed the point. Pop culture has to take the asset bubble seriously. Not be the butt of jokes, as gold was in a recent Saturday Night Live skit.

Gold may be in the 11th year of a bull market, but it is not even close to being in a bubble. Why? Because the average person hasn't caught on.

I challenge the readers to ask their family and friends whether any of them own gold...besides a bit of gold jewelry. I'm sure most of the readers of Money don't own gold.....

The bottom line for readers is that gold should be held for safety purposes, as an insurance policy against financial turmoil. Think of it as you do your homeowners insurance policy.

It will protect its owners from all the dumb policies and speculations of Wall Street and the Federal Reserve. The Fed is no longer doing its job and is deliberately trying to trash the US dollar.

Its reserves are now trash - bad bonds given to it by Wall Street. Bonds that will have to paid off by the US government, which also may be headed to insolvency.

Since the Fed is derelict, people need to have their own reserves of real money which is not falling in value. Gold, in other words.

Investing Into Technology Stocks

There is a saying people often use around the start of a new year - “Out with the old, In with the new.” That is an adage that investors in the technology sector should take to heart.

If you're going to invest in the technology sector, don't stay wedded to one particular technology or stock. Because within a few years, the technology will change and you will most likely be holding a stock rapidly losing its growth characteristics.

Look at computing. New forces in the industry seems ready to sweep away much of the old guard.

Consumers are shifting away from meeting their computing needs the traditional way. Such as buying a Dell computer, with an Intel processor, Seagate hard drive, Logitech mouse and keyboard, running Microsoft Windows operating system and perhaps Adobe media editing software.

All of the companies mentioned above are seeing their market share coming under attack from competitors offering mobile tablet devices and smartphones. Such as the iPhone and iPad from Apple.

Or other devices using processors based on technology from ARM Holdings ADR, Android operating systems from Google and have flash memory. In addition, these devices have no need for a mouse, keyboard or packaged software since they stream services over high-speed connections.


Out With the Old


Consumers love affair with these new smart mobile devices is prompting many to reassess the future of the companies that have dominated the traditional PC market.

Jim McGregor, chief technology strategy at the InStat research firm, sees 2011 as a year of consolidation. And one that sees “the beginning of the end of several technologies and high-tech companies”.

There is a growing belief that about two-thirds of Dell's revenues and half of its income operating base are at risk from declining PC and server growth in 2011. A couple of factors are at work here. Consumers are buying tablets, not notebook PCs. And businesses are buying simpler, cheaper desktop machines that run applications and services from “clouds” of data center servers.

Intel will also face challenges in 2011 and beyond from the rise of the tablet. Its share in tablets, the company itself admits, is modest. And its PC customers are moving away from its x86 chip architecture and working more and more with chip designer, ARM Holdings. Even Microsoft is finally enabling Windows for ARM processors, providing Intel with even more competition.

Rich Beyer, CEO of Freescale Semiconductor, spoke about the move away from both Intel and Microsoft: “There is a shift taking place as smart mobile devices proliferate, the market will open up and ourselves and other semiconductor and operating system companies will be sharing in what has effectively been a pure PC x86 Window market until now.”

Analysts at Nomura forecast that notebook sales in 2011 will fall by 34 per cent to 25 million units. They also extrapolate this to the entire PC chain. They predict hard times for non-tablet component makers from Seagate and Western Digital hard drive makers, to makers of mice, keyboards and non-touch screens.


In With the New


These same Nomura analysts forecast that tablets will begin to cannibalize PC sales this year with 50 million tablet devices being shipped in 2011.

This will speed up the change that is occurring across the whole computing supply chain. From retailers – where consumers buy their “computers” from a Verizon store rather than Best Buy. To the software industry, where people aren't buying shrink-wrapped products but are downloading apps and services themselves over high-speed connections.

Jen-hsun Huang, CEO of chipmaker Nvidia, says 2011 will be the year of “superphones” and tablets. The PC will remain important he says, but “everyone had better be well-positioned in mobile and cloud computing, because that's where the new growth is coming from.” Nvidia, traditionally a graphics card maker for the PC industry, has diversified with Tegra processors for mobile devices and Tesla units for high-end servers.


The Future of the PC


What will the result be of the battle between the old and the new – the PC and the tablet?

Warren East, the CEO of ARM Holdings, sees PCs in our future for now at least. He says, “I'm not a believer in the end of the PC – it offers different functionality and there's no way we'll see PCs disappear over the next five years or so.”

Of course, he knows that Intel and others will not go down without a fight. For example, Intel will introduce its next-generation processor at the upcoming Consumer Electronics Show in Las Vegas. This processor combines graphics and general processing functions on the same chip.

Intel believes that the extra computing power offered by these chips will allow PCs to offer more than tablets. Including features such as gesture recognition which may trump a tablet's touch screen.

So the war may rage on for several years, with each side claiming victories. The PC will not disappear overnight, with notebook and desktop sales still running at more than 1 million units a day. However, over the long haul, tablet devices will likely gain more and more market share.

Technology investors need to prepare their portfolios for that outcome. They can do that by removing members of the old guard, like Dell and Intel. And replacing them with members of the new guard like Apple and ARM. But remember - in a few years, even Apple may be passe.

The Greenback vs the Redback

With the new year upon us, investors need to look for trends that will influence global financial markets.

One of these trends which has been largely ignored by Wall Street is the emergence of the Chinese currency – the yuan or renminbi. China is slowly but surely internationalizing its currency. This will have a tremendous impact on trade and global financial markets.

Perhaps the real surprise is how little the yuan is used outside China's borders. China is now the second largest economy in the world, the largest exporter of manufactured goods and the largest holder of foreign exchange reserves. Yet the amount of its currency held overseas is negligible. This is a result of China's strict capital controls and restrictions on currency trading.

But that is about to change. The financial crisis has changed attitudes in Beijing. There is now growing support for a greater international role for its currency. China's long-term goal is to have the renminbi become the main currency for doing business in Asia and other emerging regions of the globe.


China's Baby Steps


China is already taking some small baby steps toward making their currency a global currency.

Over the past two years, it has tried to boost the availability of the yuan. China signed currency swap agreements, worth $800 billion renminbi, with central banks in eight countries. These countries are: Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Singapore and South Korea.

Beijing is now strongly encouraging that international trade settlement to be conducted in renminbi. That process accelerated in June when China expanded its plan to every country in the world and to 20 Chinese provinces and municipalities.

Then in July, the government allowed yuan-denominated financial markets to spring to life in Hong Kong. A month later certain investors, including some central banks were given limited access to China's onshore bond market. Malaysia's central bank is believed to be the first to hold mainland renminbi bonds in its reserves.

The purchase by Malaysia underlines the potential demand for renminbi assets among governments, banks and companies in Asia. A demand that will swamp the current limited investment opportunities.

Then in August, the Industrial and Commercial Bank of China (ICBC) allowed an Indonesian client of Chinese technology company Huawei access to a $50 million credit line in renminbi, a first for a non-Chinese company.

And just last month, China and Russia agreed to allow their currencies to trade against each other in spot inter-bank markets. This move will eventually allow the two countries settle their $40 billion in bilateral trade in their own currencies.

The effect of even these small measures has been dramatic. A year and a half ago, there was zero trade settlement in renminbi. Between June and November of this year alone, there has been 340 billion renminbi or about $51 billion in trade settlement. In addition, renminbi deposits in Hong Kong banks surged 45 per cent in October to 217 billion renminbi.

For Chinese companies, the attractions of settling cross-border trade in their own currency are clear. Avoiding the US dollar allows them to cut transaction costs and minimize foreign exchange risk. A huge benefit in a world at risk of a global currency war.


Trade Finance Growth


And an increasing number of multinationals are also experimenting with using the yuan in trade deals. This include American multinationals like McDonald's.Additionally, it and Caterpillar are the first two multinationals to issue bonds which are denominated in the renminbi.

This is very likely the beginning of a major trend. Shivkumar Seerapu, the Asia head of trade finance at Deutsche Bank, said “For our corporate clients, US dollars and euros are no longer the de facto currencies of trade.”

Deutsche Bank, Citigroup and JPMorgan are among global banks rapidly building the infrastructure needed to process renminbi transactions across the world.

However, two banks are already well-placed because of their strong positions in Hong Kong, the designated offshore center for the Chinese currency. These banks are HSBC Holdings and Standard Chartered.

The head of transaction banking for North Asia at Standard Chartered, Neil Daswani, says demand for the yuan has been strongest from Hong Kong. But he has also seen strong demand coming from Singapore, Malaysia, South Korea, Japan, the Middle East and the UK.

Trade finance experts believe the use of the renminbi in trade is likely to take off first in Asia. And then between China and other developing countries.

HSBC estimates that within three to five years at least half of China's trade flows with other emerging economies will be conducted in renminbi. This trade flow is valued at about $2 trillion! If this does occur, it will make the yuan one of the top three global trading currencies.


Chinese Currency Investments


It is no wonder then that some people in China have begun calling their currency the hongbi or “redback”. They believe the redback will become a true global rival to America's greenback.

Qu Hongbin, China economist at HSBC, believes the redback-greenback rivalry is for real. He said, “We may be on the verge of a financial revolution of truly epic proportions. The world economy is, slowly but surely, moving from greenbacks to redbacks.”

There are still many hurdles remaining before the renminbi becomes a true global currency. Such as the dense wall of capital controls that limit foreign inflows and outflows of funds.

However, as the yuan starts to play a bigger role in Asian trade settlement, it will lead to a buildup of the currency outside China. Asia's banks and companies will become a powerful lobby of investors wanting increased access to renminbi investments.

Eventually this will lead to China's currency becoming fully convertible. And as Adam Gilmour, co-head of foreign exchange sales for Asia at Citigroup, said “When that happens, I expect a significant amount of the world's reserves to go into renminbi.”

So it is a legitimate investment theme worth putting money into. The problem is that unless you're a major corporation which trades with China, no American can directly get a hold of any redbacks.

The only direct currency options investors have are an exchange traded fund and exchange traded note. They are the Market Vectors Chinese Renminbi/USD ETN and the WisdomTree Dreyfus Chinese Yuan Fund.

Neither offers direct exposure to the Chinese currency. Both are intended to match the currency's movements through the use of various derivatives.

With China gradually widening use of its currency, hopefully better alternatives appear for American investors in the near future.

2011 Investment Forecast

It's that time of the year again when everyone looks forward optimistically to a brand new year. And it's also the time of year when you hear all sorts of predictions for the new year.

As I did last year, I will share a few of my thoughts about the upcoming year in the financial markets. But first, I will look back at 2010.

It was the year when everyone looked like an investing genius. It didn't matter where you put your money as most investment classes were up strongly for the year. US stocks – up, overseas stocks – up, corporate bonds – up, overseas bonds – up, Treasuries – up, commodities – up.

About the only thing that was lower was the US dollar. The rally in the financial markets and the weakening dollar had the same cause...the Federal Reserve's policies.

The Federal Reserve's policy of quantitative easing (which is money printing, despite what Ben Bernanke says) has flooded the banks with dollars. The Wall Street banks, of course, have gladly taken this money. Taken it not to lend to individuals or businesses, but to continue their orgy of speculation in financial markets.

Large investors, many of them overseas, see the long-term implications of this policy (a debased US dollar) and have sold the dollar. Thus we have a lower US dollar...which effects each American in his or her everyday life.

Here is just one example: I'm sure many of you have noticed the price of gasoline rising at the pump. And yes, there are some legitimate reasons for the rise, such as increased demand for oil in emerging markets like China.

But much of the rise in the price of oil and gasoline is due to the weakening US dollar. It's not so much that oil is going up in price, but that the currency it is priced in – the dollar – is going down in price.

But enough about 2010, what will happen in 2011?

The obvious answer is that no one knows. At best, it's an educated guess. For what it's worth, here is my two cents worth.....


GOVERNMENT BONDS - It is ok to park your short-term money into short-term US Treasury bills, but I continue to urge all investors to avoid any longer-term US Treasuries. The beginning of the bursting of the Treasury bubble may have begun in the last months of 2010.

Treasuries sold off sharply, as did municipal bonds. Fears have begun creeping into the muni market as investors begin to awaken about the dangers of outright default of some governments' bonds. The carnage in munis may have just begun.

OTHER BONDS - I do continue to like other bonds, such as corporate bonds of strong multinational companies. Another area I like for the long-term are bonds of emerging market countries which continue growing rapidly and are becoming less dependent on the United States. Trade between emerging market nations is booming.

CURRENCIES – Longer term, unless US government policies change, there is only one direction for the US dollar – down. The currencies I continue to like for the longer-term are those of the major emerging countries like Brazil and China and also the currencies of country that have and produce lots of natural resources like Canada and Australia. These currencies did very well in 2010.

COMMODITIES - I continue to urge people to add gold and silver to their portfolio as an 'insurance policy'. I do expect commodities to seesaw higher, propelled by a lower US dollar, increasing demand for commodities from emerging markets and most importantly - diminishing production.

Most people are unaware that the production of many commodities is dropping. These commodities include not only oil, but also copper and tin, and agricultural commodities like sugar, cocoa, wheat and corn. And to bring a major project online, be it either a mine or an oil field, takes 5 to 10 years.

STOCK MARKETS - I do expect to see a large correction in ALL global stock markets fairly soon. With that being said, I still favor the emerging markets for the long-term. The future of the global economy lies with these nations - this is where most of the economic growth will come from. Of course, many American companies can and will participate in that growth.

I continue to favor sectors that benefit from the growth in the emerging markets such as commodity and industrial companies, and other sectors such as consumer goods and technology.

The only sector I strong dislike globally is the western financial sector. Financial companies in the US and Europe still have trillions in bad loans still 'hidden' and papered over by government support.

That's my two cents worth, please feel free to give me your thoughts by sending me an email.

I hope everyone has a happy and prosperous new year!