Sunday, October 10, 2010

Osborne Says He'd Approve a Bank of England Request for Monetary Stimulus

From Bloomberg:

Chancellor of the Exchequer George Osborne said he is prepared to give the Bank of England the green light for more monetary stimulus if the central bank judges it’s needed to keep the U.K. economy from slipping back into a recession.

Osborne said he will bow to any decision made by the central bank’s nine-member Monetary Policy Committee, led by Governor Mervyn King, to expand its 200 billion pounds ($319 billion) bond purchase program, a strategy called quantitative easing.

“If it makes judgments, then I would basically follow those judgments,” Osborne told reporters in Washington, where he is meeting ministers and central bank governors at the International Monetary Fund.

The Bank of England kept up emergency stimulus and left its interest rate at a record low as officials debate whether to join a global push to pump more aid into the world economy. The pound rose to an eight-month high against the dollar this week following the decision, which came after official Adam Posen stoked speculation that the bank could loosen monetary policy as soon as this month.

Other central banks are already signaling they will inject more economic stimulus to shore up a flagging global recovery. The Bank of Japan this week established a 5 trillion yen ($60 billion) fund to buy assets. U.S. Federal Reserve Chairman Ben S. Bernanke said on Oct. 4 that further asset purchases may help the U.S. economy.

‘Staggered Plan’

Osborne also softened his rhetoric on his plan to implement the biggest squeeze on government spending since World War II, saying that, because it will be spread out over several years, it won’t derail economic growth.

“We have a staggered plan over four years,” Osborne said. “It does not come into effect overnight.”

Earlier this week, Osborne told the Conservative Party’s annual conference that the U.K. risks the downgrading of its top-notch credit rating, market turmoil and rising interest rates if it delays cuts to public spending.

He said he was “doing it by the book” by cutting welfare, taxing consumption and reducing tax and regulatory burdens on companies so that they can stimulate growth. He said an increase in the value-added tax and an income tax increase to 50 percent for the highest earners introduced by his Labour Party predecessor, Alistair Darling, together with his own plan for 6 billion pounds of spending cuts this year hadn’t hurt the economy.

“I don’t think you can point to a material impact on the U.K. economy this year,” Osborne said.

Truth about Markets - London

Max and Stacey talk about Currency Wars, Gold, Silver and World politics. Listen here

David Frost - Interviews Tony Blair

If you ever wondered what happened to David Frost well the poor old bugger is still interviewing the infamous and pompous and trying to cut them down to size with his easy going manner. On this occasion he interviews Tony Blair on his time as PM, world affairs, and the wars in Iraq and Afghanistan. Watch out for Tony linking Iraq and 911 in the same breath, even though most of the alleged terrorists were Saudi. Then Tony being amazed that the killing of over 1 million Iraqi civilians during the invasion and occupation of Iraq might have just miffed a few of their brethren in the Arab world. Even though the head of MI5 during Tony's watch says that the wars have bred a generation of terrorists. Also lets not forget that this is the UK's 4th war in Afghanistan and the Afghans haven't forgiven Brittan for the last 3 invasions yet.

Gold rises 1 percent on weak payrolls, Fed easing hopes

NEW YORK | Fri Oct 8, 2010 4:10pm EDT

NEW YORK (Reuters) - Gold rebounded 1 percent on Friday a day after a sharp retreat, as a weak U.S. employment report spurred buying by investors who expect the Federal Reserve will start buying government debt again to stimulate the economy.

It was the fourth consecutive weekly rise for both gold and silver. For the week, silver was up 5 percent, outperforming gold's 2 percent rise.

A U.S. Labor Department report showed the U.S. economy shed jobs in September for the fourth month in a row as government payrolls fell and private hiring slowed.

Miguel Perez-Santalla, vice president of sales at Heraeus Precious Metals Management, said that the weak jobs data should push the Fed toward trying to stimulate growth through what is known as quantitative easing, or QE2 as the market calls it.

"Quantitative easing means more money in the system. With that, there's going to be possible market devaluation. And as the currencies lose value, how do you protect against that? A lot of people are looking into gold," he said.

Spot gold was up 0.9 percent at $1,344.35 an ounce at 2:58 p.m. EDT (1858 GMT) , after peaking at $1,349.70 an ounce in earlier trade.

U.S. gold futures for December delivery settled up $10.30 an ounce at $1,345.30. Final volume was about 195,000 lots, 50 percent above its 30-day average, preliminary Reuters data showed. COMEX gold open interest eased but held near a record high 621,941 lots as of Wednesday.

Gold prices were choppy early, hitting a session low of $1,324.85 an ounce after St. Louis Fed chief James Bullard said policy makers face a tough decision at next month's meeting.

The Reuters-Jefferies CRB index, a global commodities benchmark, hit two-year highs as U.S. grains and oil markets led a broad commodities rally, while the dollar slipped to new lows against a basket of major currencies.

The dollar fell 7.5 percent last month versus the euro, its biggest monthly decline since December of 2008.


Gold has rallied about 10 percent since the end of August. It hit a record high on Thursday of $1,364.60 an ounce before finishing lower for the day. The precious metal is viewed as a hedge against inflation and dollar depreciation. (Graphic: )

Some investors thought gold's sharp drop on Thursday after hitting a record high might signal the start of a correction. Hansen said a resilient dollar may yet keep gold from rising too high.

Gold investors are also waiting to see how this weekend's annual meeting of the International Monetary Fund and World Bank will affect foreign exchange markets.

The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, reported a 13.4 tonne outflow on Thursday, the biggest one-day drop in its holdings since late July.

Commerzbank wrote in a note that the outflows from gold ETFs signal that short-term speculators caused the latest swift rise in gold prices.

Among other precious metals, silver surged 2.8 percent to $23.15 an ounce, near Thursday's 30-year high of $23.51 an ounce.

Platinum rose 0.5 percent to $1,699.50 an ounce, while palladium climbed 0.9 percent to $584.50.

More on The Currency Wars

Al Jazeera’s Inside Story – Jerome Kerviel: Villain or Victim?

Currency Wars: The Phantom Menace

By Kieran Osborne, CFA, Co-Portfolio Manager, Merk Mutual Funds
8 October 2010

The last thing the global economy needs right now is anything that would hamper or derail economic growth. Unfortunately, there appears a growing specter of this occurring. Brazil and Japan's recent decisions to intervene in the currency markets follow a disturbing trend. If policy makers are not careful, present dynamics may precipitate a worldwide economic slowdown, brought about by protectionist pressures and exacerbated by political motivations globally.

Competitive currency devaluation appears to be the name of the game for many Treasury departments and central banks alike. It may also be a key driver of the recent strength in gold; in such an environment, an asset that retains its intrinsic value is increasingly sought after. Vietnam instigated a devaluation of the dong earlier this year, Switzerland, a country renowned for stability and neutrality, attempted to devalue the Swiss franc relative to the euro, rhetoric out of Washington has intensified surrounding China's decision to continue to peg its currency closely to the U.S. dollar, and now Japan and Brazil have both decided to take unilateral action, intervening to weaken their respective currencies.

For many countries, the motivation to devalue the currency is to spur export growth. Devaluing a countries' currency is akin to providing a subsidy to the export sector, as it makes that country's exports relatively cheaper. The flip side, is that it intensifies inflationary pressures, as a devalued currency means that imported goods become relatively more expensive; for a high-growth developing economy, the combination of an undervalued currency and increased production and labor costs can cause substantial domestic inflationary pressures, as evidenced in China.

Moreover, devaluing a currency may lead to escalating international political strains, global criticism and intensification of protectionist pressures. Maybe the most prevalent example being the U.S. criticism leveled at China, culminating in the passing of legislation aimed at pushing up the value of the yuan. When one currency is artificially weak, other countries may be put at a disadvantage, as other countries' goods and services may be less competitive in the global market. Such a situation can and has encouraged retaliation, whether through competitive currency devaluations or outright trade wars, in the form of additional import taxes and duties levied, or sanctions placed, on specific exporting countries deemed to be manipulating their currencies. Trade wars are good for no one: they create inefficiencies and slow down global growth. In a period of lackluster global growth, this is the last thing we need. Recent references of a "race to the bottom" and worldwide "currency wars" should not be taken lightly - given that the global economic recovery remains on unsteady ground, the implications of another slowdown in growth could be disastrous.

We have discussed at length the very questionable currency policies pursued by the Swiss National Bank (SNB) - see our analysis here - and have been heartened to see that the SNB appears to have come to its senses and discontinued this approach.

We have long argued that China should allow its currency, the yuan or renminbi (CNY), to appreciate, as it may help alleviate much of China's domestic inflationary pressures. China has continued to rely on rather rudimentary banking regulation to curb lending and growth in monetary aggregates to rein in inflation, and recently announced a plan to allow the currency to trade within a wider trading band. It turns out that "wider band" is a relative term; the CNY has appreciated by a little over 2% since the announcement in June. The Chinese are unlikely to allow the currency to float freely overnight, as even small moves to the currency affect many businesses throughout the Chinese economy; the process is likely to play out over many years. This hasn't stopped U.S. politicians from taking a swipe.

While Treasury Secretary Geithner's recent testimony to congress fell short of labeling China a currency manipulator (and was much less aggressive than many politicians had hoped for), the message out of Washington is clear: the U.S. is increasingly unhappy with China's exchange rate policies. In our opinion, however, China is unlikely to allow the currency to appreciate simply because of threats from Washington; rather, they will act in the best interests of China. Moreover, the debate over China's currency policies is to some extent misguided: many politicians argue that a stronger CNY will generate jobs in the U.S. To a degree, this may be true: U.S. based companies may think twice before making the decision on additional hires should the CNY appreciate. But it is unlikely that much of the jobs that already left as part of the outsourcing bubble that occurred throughout the last decade will return to the U.S.; the U.S. simply cannot compete on cost; these jobs are likely to migrate to lower value producing countries, like the Philippines, Vietnam or Thailand.

These countries produce goods at the low-end of the value chain, have limited pricing power and are therefore forced to compete predominantly on price. As such, and in our opinion, these countries are more likely to instigate competitive devaluations of their currencies. With an ever-deteriorating consumer outlook in the U.S., the incentive for these countries to instigate competitive devaluations of their currencies grows significantly. Indeed, Vietnam has already intervened in the currency market, actively weakening the value of the dong (VND). With a continued weak consumer outlook in many western nations, it is quite likely that further competitive currency devaluations occur in the lower-value producing Asian nations.

Brazil's economic expansion, and the substantial appreciation of the Brazilian Real (BRL) share similarities to the Australian experience. Rich in commodities and natural resources, both countries have benefited from insatiable demand out of Asia, particularly from China. Both economies have rebounded strongly and in both nations, the unemployment rate has declined steadily, and remains well below the levels seen throughout much of the western world. Both central banks have led the world in interest rate increases, with the Reserve Bank of Australia raising the target rate by 1.5% since the latter half of 2009 and Brazil's central bank raising rates by 2%. Increased investment demand has flowed into both nations and as such, both nations' currencies have appreciated substantially: relative to the U.S. dollar, the Australian dollar (AUD) has appreciated 39.9% for the period March 31, 2009 to September 30, 2010; during the same period, the BRL appreciated 37.7%.

When it comes to exchange rate policies, the similarities stop there. Brazilian finance minister Guido Mantega has been particularly vocal about the government's concerns surrounding the strength of the BRL, describing the present situation as an "international currency war". Brazil previously imposed a 2% tax on foreign purchases of fixed income securities and stocks in October 2009, in an attempt to curb gains in the currency. Brazilian policy makers have now stepped up their offensive, increasing the tax on inflows to 4% and buying billions of dollars in the market in an attempt to stave off further currency appreciation. Speculation is rife that further steps will be taken, or that direct capital controls may be implemented. The government is certainly not taking this issue lightly, sending the ominous message that they are "not going to lose this game."

Conversely, Australia has been a leading proponent of the virtues of a free-floating currency, namely protection against inflationary pressures and boom-bust cycles. The Reserve Bank of Australia has lauded the flexible exchange rate as one of the great success stories of Australian economic policy making. In their opinion, Australia's free floating currency has helped mitigate exaggerated economic booms and busts and has protected against high, and volatile, inflation. Currency price movements helped the economy adjust more smoothly to the current boom in the resource sector, helped protect the economy in 2008 when global risk aversion was at its peak, and during the Asian financial crisis and the bursting of the U.S. tech bubble.

Brazilian policy makers may do well to heed their Australian counterparts: the appreciation of the BRL has undoubtedly helped alleviate inflationary pressures in Brazil, helping bring inflation back towards the target rate of 4.5% from over 6% previously, and could help bring the rate to a more price stable level. While Brazilian policy makers may or may not succeed in destroying the currency, one thing is for sure: they run the very real risk of alienating Brazil from global markets. In our opinion, Brazilian politicians' motivations are flawed: on the one hand they believe the strong appreciation of the BRL will stifle economic growth; on the other hand the talk of imposing rather draconian measures to stem demand for the currency will likely drive investment away. These are the same investment flows required to drive economic growth in Brazil.

Potentially more damaging globally is if these actions prompt other nations to follow a similar path. Already we have seen South African, Peru, and Mexican politicians (amongst others) uttering misgivings about the strength of their respective currencies. Should we enter a period of competitive currency devaluations globally, the risks of trade wars may increase substantially, which could come with serious consequences for global markets.

Countries that run current account deficits, including the U.S., may be at the greatest risk should a global trade war scenario play out, as these countries are reliant on foreign investors to finance their deficits. Should additional tariffs, capital controls or sanctions take effect (a very real threat given recent legislation surrounding currency manipulation), the U.S. may lose the trust of international investors, who may in turn pull funds out of its markets, putting pressure on the U.S. dollar.

BofA halts foreclosures all 50 U.S. states

Oct 8 (Reuters) - Bank of America Corp (BAC.N) is halting foreclosures and sales of foreclosed properties in all 50 U.S. states pending a review of its internal processes, the bank said on Friday.

BofA, the largest U.S. mortgage servicer, is the first U.S. bank to suspend foreclosures in all 50 states. The step comes amid a growing furor over how the largest U.S. mortgage lenders are repossessing the homes of delinquent borrowers.

Critics contend the banks' use of "robo-signers" and other automated processes is unfairly pushing residents out of their homes.

A spokesman for Charlotte, North Carolina-based BofA defended the bank's previous foreclosures.

"We will stop foreclosure sales until our assessment has been satisfactorily completed," the spokesman, Dan Frahm, said in a statement. "Our ongoing assessment shows the basis for our past foreclosure decisions is accurate."

Last week, BofA, JPMorgan Chase & Co (JPM.N) and Ally Financial Inc's GMAC Mortgage announced plans to suspend foreclosures in 23 states pending a review of foreclosure procedures.

Geithner didn't comment on Japanese intervention

By Leika Kihara
WASHINGTON | Sat Oct 9, 2010 6:01pm EDT

WASHINGTON (Reuters) - Japanese Finance Minister Yoshihiko Noda said Treasury Secretary Timothy Geithner did not make any specific comments about Tokyo's currency intervention when they met on Saturday.

"I explained that issue quite elaborately (at the Group of Seven dinner meeting) yesterday, so I didn't explain it again today," Noda told reporters after the bilateral talks held on the sidelines of the IMF meetings.

Noda said he instead explained Japan's economic stimulus plans and measures to boost potential growth. He declined to comment on whether there were any discussions on currency issues, including Japan's intervention and the thorny issue of China's yuan reform.

Tokyo intervenened in the currency market for the first time in six years on September 15, as the yen's steady rise against the dollar threatened to derail an export-reliant recovery from Japan's worst recession in decades.

Investors remain on full alert for further intervention by Japan after an unexpected drop in U.S. payrolls data pushed the dollar to a fresh 15-year low against the yen on Friday.

While last month's solo intervention drew criticism from some European policymakers, the United States has refrained from openly voicing discomfort over the move.

Noda had explained the rationale behind Japan's intervention at the Group of Seven working dinner on Friday.

Noda had said he believed he gained the understanding of Japan's G7 counterparts that last month's action was aimed at countering excessive currency moves, and that Tokyo was not about to conduct a prolonged, massive intervention aimed at driving down the yen to a certain level.

Everything You Need to Know about the Stock Market - Brain Damaged Investors Make More Money!


People with certain kinds of brain damage may make better investment decisions. That is the conclusion of a new study offering some compelling evidence that mixing emotion with investing can lead to bad outcomes.

By linking brain science to investment behavior, researchers concluded that people with an impaired ability to experience emotions could actually make better financial decisions than other people under certain circumstances. The research is part of a fast-growing interdisciplinary field called "neuroeconomics" that explores the role biology plays in economic decision making, by combining insights from cognitive neuroscience, psychology and economics. The study was published last month in the journal Psychological Science, and was conducted by a team of researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa.

The Price of Fear

[The Price of Fear]

A new study shows people with brain damage that impaired their ability to experience emotions such as fear outperformed other people in an investment game.

  • The brain-damaged participants were more willing to take risks that yielded high payoffs.
  • They were less likely to react emotionally to losses.
  • They finished the game with 13% more money than other players.

The 15 brain-damaged participants that were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions, which inhibited their ability to experience basic feelings such as fear or anxiety. The lesions were due to a range of causes, including stroke and disease, but they impaired the participants' emotional functioning in a similar manner.

The study suggests the participants' lack of emotional responsiveness actually gave them an advantage when they played a simple investment game. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. Players with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end.

Some neuroscientists believe good investors may be exceptionally skilled at suppressing emotional reactions. "It's possible that people who are high-risk takers or good investors may have what you call a functional psychopathy," says Antoine Bechara, an associate professor of neurology at the University of Iowa, and a co-author of the study. "They don't react emotionally to things. Good investors can learn to control their emotions in certain ways to become like those people."

The study demonstrates how neuroeconomics can offer insight into a question that has become a growing focus of economic inquiry: Why don't people always act in their own self-interest when they make economic decisions?

Though the field is still in its infancy, researchers hope neuroeconomics could someday have dozens of real world applications -- like explaining how brain chemistry influences market phenomena such as bubble manias and investor panics. Wall Street executives already are paying attention to the findings, since it offers insight into what motivates investors.

"This branch of inquiry and economic investigation is really fortifying and buttressing our understanding of investor behavior," says David Darst, chief investment strategist in the Individual Investor Group at Morgan Stanley. "It's beginning to inform our tactical decisions."

Using sophisticated brain-imaging technology such as magnetic resonance imaging, or MRI, tests and other tools, neuroeconomists peek inside people's brains to see which regions are activated when we engage in behaviors such as evaluating risks and rewards, making choices and cooperating with other people. Neuroeconomic researchers also tap into brain activity by measuring brain chemicals and exploring how damage to specific brain regions impacts economic decision making.

Neuroeconomics grew out of a related field called behavioral economics. Behavioral economists use insights from psychology and other social sciences to explore why humans don't always behave as predictably as standard economic models suggest they should.

In the late 1990s, when the links between psychology and neurobiology were firmly established, behavioral economists began turning to neuroscientists, in addition to psychologists, for help explaining human behavior. The idea was that if brain chemistry could explain phenomena such as depression or attention deficit disorder, it might also help explain more mundane psychological functions, such as how people reach financial decisions.

Behavioral economists, like Princeton's Daniel Kahneman, who won the Nobel Prize for Economics in 2002, began teaming up with neuroscientists, like Peter Shizgal at Concordia University in Montreal. In one study, the pair used gambling games and neuroimaging techniques to look what part of the brain is triggered when people anticipate winning money. They found that monetary rewards trigger the same brain activity as good tastes, pleasant music or addictive drugs.

The 41 participants in the new study included people with and without brain damage, including a control group of participants with brain damage that didn't affect their emotional processing. Players were given $20 and asked to play a simple gambling game that involved 20 rounds of coin tosses. If they won a coin toss, they earned $2.50. If they lost the toss, they had to give up a dollar. They could choose not to play in any given round, in which case they kept their dollar.

Logic indicates that the best strategy was to take the gamble in every round of the game, since the return on a win was much higher than the potential loss, and the risk in each round was 50-50. The players with emotion-related brain damage took a more logical strategy, investing in 84% of rounds, while the nonbrain-damaged players invested in just 58% of the rounds. Emotionally impaired participants outperformed the nonbrain-damaged participants, winding up with an average of $25.70 versus $22.80 at the end of the game.

The researchers believe fear had a lot to do with the poor performance of nonbrain-damaged participants. "If you just observe these people, they know the right thing to do is invest in every single round," says Baba Shiv, an associate professor of marketing at the Stanford business school and a co-author of the study. "But when they actually get into the game, they start reacting to the outcomes of the previous rounds."

Yet emotions may play a useful role in financial decision making. While the brain-damaged players did well in the specific game in the study, they didn't generally perform well when it came to making financial decisions in the real world. Three of four of the brain-damaged players had experienced personal bankruptcy. Their inability to experience fear led to risk-seeking behavior, and their lack of emotional judgment sometimes led them to get tangled up with people who took advantage of them. Their life experience suggests emotions can play an important role in protecting our interests, even if they sometimes interfere with rational decision making.

Humans developed this fear response as a survival mechanism to protect against predators. But in a world where predators aren't lurking around every corner, this fear system can be over-sensitive, reacting to dangers that don't actually exist and pushing us toward illogical choices.

"There was no such thing as stock in the Pleistocene era," says George Loewenstein, a professor of economics at Carnegie Mellon University, and a co-author of the study. "But human beings are pathologically risk averse. A lot of the mechanisms that drive our emotions aren't really that well adapted to modern life."