Highlights of the Week of; August 26 2013

india-brazilindonesiaInterestrates_hike

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of August 26th, 2013.:

  • Brazil, India and Indonesia, increased their key rates in order to sustain their respective currencies.
  • DOW-Jones industrial 4.4 percent down in the month of August 2013.
  • Japan Prices Rise at fastest pace since 2008.

Brazil Central Bank raise interest rate to 9 percent on August 28th:
The Brazilian Central Bank, at its monetary policy meeting on Wednesday, August 28th, 2013, raised the key rate by half a percentage point for a third straight meeting, as a plunge in the currency undermines efforts to slow inflation in the world’s second-largest emerging market.

Brazil’s inflation rate is currently 6.15 percent, which is below the June peak of 6.7 percent, but still perilously close to the 6.5 percent ceiling of the government’s inflation-targeting range for the year and higher than the 2012 year-end rate of 5.8 percent.

The “Brazilian Real” has appreciated nicely, from its low of December 1, 2008 of
BRL 1.00 = USD 0.3897, to peak on July 18, 2011 at an exchange rate of
BRL 1:00 = USD 0.6442, since then the Brazilian currency is in a free fall to close at
BRL 1.00 = USD 0.4219, on Friday, August 30, 2013, as can be seen from below chart.

BRL-USD August 30 2013

The State Bank of India raises interest rates on bulk deposits on August 30th:
The State Bank of India (SBI), the largest public sector lender in the country, has announced on Friday, August 30th, 2013, that the interest rate for bulk deposits for the tenors 7 days to 60 days will be 9 percent per annum and for the tenor 61 days to less than one year will be 8.25 percent per annum effective from August 31st, 2013.

The bank raised interest rates by up to 1.5 percent on bulk deposits of over 10 million Rupees.

These measures have been taken to sustain the Indian Rupee, the domestic currency, which has lost more than 21 percent against the US dollar since May this year, as can be seen from below chart.

INR-USD 2-Year Chart

SBI chairman on Friday, August 30th, ruled out any hike in lending rate, although many private sector banks have done so due to the uptick in the cost of funds following RBI’s liquidity squeezing moves.

Industry insiders say state-run banks may not increase lending rates due to “diktats from the Finance Ministry”

Indonesia increased hikes key rates on August 29th:
The Indonesian Central Bank increased both its benchmark interest rate and its overnight deposit facility rate by 50 basic points on Thursday to 7 percent, in its latest attempt to defend the Indonesian Rupiah.

As can be seen from below 1-year chart, the Indonesian Rupiah is down more than 6 percent against the U.S. dollar this month and more than 13 percent, so far this year, reflecting concerns about Indonesia’s widening current account deficit and raising the dangers of imported inflation.

IDR-USD 1 year chartThe decision at Thursday’s extraordinary policy meeting comes two weeks after the Central Bank declined to raise rates to avoid harming growth. It followed a similar move Wednesday in Brazil, another prominent emerging economy whose currency has been pummeled by investors.

Indonesia’s current account deficit hit a wider-than-expected US$ 9.8 billion in the second quarter -equal to 4.4 percent of gross domestic product- from 2.6 percent in the first quarter, making it crucial for the country to attract foreign funds to cover the gap. Bank Indonesia said Thursday the current-account deficit should narrow to 3.4 percent of GDP in the third quarter.

As can be seen from below chart, Indonesian inflation reached a 12-month high of 8.61 percent in July after the government cut costly fuel subsidies in June.

Indonesian 1-year Core Inflation

Indonesian 12-month core CPI figures

The Central Bank, Thursday estimated headline inflation in a range of 9.0 -9.8 percent for the year, well above its initial target range of 3.5- to 5.5 percent and a previous estimate a month ago of around 8 percent.

Economists and analysts expect that the Indonesian inflation, due to a weaker Rupiah and inflation pass-through, may hit double-digits soon, which will lead to further tightening by the country’s Central Bank in the future.

DOW-Jones industrial 4.4 percent down in the month of August 2013:
The Dow Jones Industrial Average fell 30.64 points, or 0.2 percent on Friday August 30th, to close at 14,810.31 ahead of the long Labor Day holiday weekend, for which US markets will be closed Monday, September 2nd, 2013. The Dow fell 4.4 percent during the month, its biggest monthly retreat since May 2012.

Please view below 1-month chart of the DOW Jones Industrial for details.

DOW Jones 30 Days August

On Friday, August 30th, the S&P 500 fell 5.20 points, or 0.3 percent, to 1,632.97. The Nasdaq Composite Index dropped 30.43 points, or 0.8 percent, to 3,589.87. For the month of August, the Nasdaq and S&P-500 fell respectively 2.33 percent and 4.02 percent.

On the economic front, Americans’ personal spending rose 0.1 percent in July, at a slower rate than June’s upwardly revised 0.6 per cent increase, according to the Commerce Department. Personal incomes rose 0.1 percent, the slowest advance since April. Both readings were shy of economists’ forecasts.

Japan Prices Rise at fastest pace since 2008: 
Japan’s core consumer inflation rose to its highest level in almost five years in July, while industrial output posted a strong rebound and the jobless rate fell to its lowest level since 2008, data on Friday August 30th, showed, in the latest signs that a recovery in the world’s third largest economy is taking hold.

The core consumer price index (CPI) rose 0.7 percent in July from a year earlier, hitting its highest level since November 2008 as can be seen from below chart.

Japan Inflation chart

The Bank of Japan, under the firm direction of, prime minister, Shinzo Abe, is aiming to keep monetary policy loose enough to achieve a 2 percent rate of inflation by March 2015. Mr Abe, for his part, has adopted a more flexible approach to fiscal spending while pushing for various structural reforms to boost Japan’s attractiveness as an investment destination.

However, the figures showed that while resource-poor Japan is paying more for mineral fuels, a broader, demand-driven recovery is yet to take hold. Excluding fresh food,
the 
all-items index rose by 0.7 percent from a year earlier and by 0.1 percent from June.

But excluding the cost of energy from the calculation brings the yearly CPI to minus 0.1 percent. The prices of items such as housing, furniture, medical care and culture and recreation all fell from a year earlier, while charges for fuel, light and water rose by 6.4 percent.

PGM Capital comments:
Friday August 30th. 2013. was the last trading day for the month of August 2013.

September has historically been the worst month of the year for stocks. The Dow has declined in 67 of 116 Septembers in its history, or about 58 percent of the time, while suffering an average loss of 1.1 per cent during the month. On the other hand, September is also the best month for the price of Gold as can be seen from below 30-years average Gold chart.

Gold Seasonal 30-years average chart

In spite of U.S. keeping rates at zero percent for over four years and three rounds of quantitative easing, (core) inflation outside of commodities has been relatively muted in America.

The reason for this is that emerging economies around the world have bought U.S. dollars, bought dollar denominated assets, or kept their monetary policies easy to preserve exports and lock in step with Fed money printing.

As a result, manufactured goods which are produced either in the USA or in emerging market nations, have remained cheap. This policy also has the side effect of high inflation rates across Asia and Latin America.

So in fact, the QE-program of the FED, is flooding emerging markets with printed US-Dollars for imported commodities or manufactured goods, which can be considered exporting USA-inflation to Asian and South American emerging economies.

Below points explain how USA is exporting its inflation to the emerging Economies:

  • American people buy stuff they don’t need from mainly Chinese companies with money they don’t have on US bank credit cards.
  • US Bank creates new US dollars out of thin air by creating debt for American people and giving US dollars to emerging market companies.
  • New debt stays in America while new US dollars leave America.
  • Emerging markets’ Central Banks put US dollars in a vaults out of circulation.
  • New US dollars, which are out of circulation, do not impact market value of existing US dollars and therefore do not impact US dollar price inflation.
  • When newly created emerging market currencies are circulated, they negatively impact the value of existing emerging market currencies, thus causing rising price inflation in emerging market economies.
  • US dollar value remains artificially high while the value of Emerging market currencies declines.
  • American people and Emerging market people are getting poorer, while US banks, and companies and Central Banks in emerging markets are getting wealthier.

Most investors will ask themselves, “Why does the US government want to export inflation?”

The answer is simple, exporting inflation allows the US dollar to remain artificially strong for a prolonged period of time. The US dollar money supply inflation that should be causing the value of the US dollar to decline is not in circulation. An artificially strong US dollar translates into artificially low US dollar interest rates.

Artificially low interest rates encourage Americans to take on more debt than they otherwise would.

These artificially low interest rates are the equivalent of a temporary wealth transfer from the entire world to Americans.

The problem with this scheme is, that it cannot go on forever, because these emerging market economies, which are now sitting on these QE US Dollars, are already in the process of using these dollars to buy Gold on any dip. This may also be a reason why Gold is temporarily in a depressed price situation, because in this cat and mouse game between the USA and the emerging market economies, these countries need a low Gold price for them to use their excessive amount of US Dollars to buy as much Gold as they can get their hands on.

Rumors that India might buy gold from citizens to ease rupee crisis, is sustaining this point.

Source:

A silent detail in this matter is that Indian households holds about 31 thousand metric-tonnes of Gold which is approx. 150% of the total reserves of the FED and ECB together.

The above really shows that the currency war is in full swing.

Due to this, it is not IF but WHEN will these excessive amounts US Dollar return home to the USA. When this happens, it has the potential of making the US Dollar worthless, spiking interest rates and, causing a hyperinflation in the USA. On the other hand, hard assets, like gold will shoot through the roof, causing the biggest shift of wealth ever seen on the planet, from those who have their asset in paper fiat currencies to those who have their assets and wealth in hard assets like Gold, Silver, Platinum and Palladium.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

 

 

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