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George Dorgan

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  • Italy: The New 'Powder Keg' Of Europe [View article]
    Thank you for the collection of good information and charts.
    However, your analysis that Italian government bonds and stocks would be overvalued is DEEPLY FLAWED.
    You are missing some basic understanding of global macro and mentalities.

    Some reasons are:
    1) Shorting Italian government bonds, as you might suggest, could be another widow-maker trade, similar to shorting JGBs. Both Japan in the early 2000 and Italy or Spain today have in common that they have current account surpluses and very low (Italy) or negative (Spain) wage increases.
    The main driver for government bonds is local demand from risk-averse investors, e.g. banks, insurances or pension funds. The main driver of bond yields is and remains inflation that those conservative investors have to account for. European austerity and slow growth has destroyed the expectation that wages or inflation rise in the mid-term future, similarly as the bust of the Japanese bubble did.
    Investors remember that Italian workers wanted wages increases that were higher than inflation (so-called "Scala Mobile")

    Why have U.S. treasuries fallen in price? The main reason is that investors expect U.S. wages and inflation to rise again.
    More about inflation expectation as main driver of bond yields: http://bit.ly/1gkG8Og

    You claim to be a contrarian. For a real contrarian like we are, Italian bonds are still cheap.

    2) Similarly as JGBs, the risk for Italian government bonds is very limited. The reason is that Italians, similarly as Japanese, have relatively high private wealth. I suggest this graph http://bit.ly/1gkG8Ok or our chapter on the ECB wealth reports, "Why median Italians are richer than Germans". http://bit.ly/1gkGbd7
    Your graph of 1980-2011 GDP growth, where Italy is weak: How much is this GDP data reliable in the case of Italy. How much black wealth have Italians accumulated which is not reflected in your GDP figures? Similarly as one of the ministers, many Italians have one home which is declared to tax authorities, one other not declared.

    3) Coming to stocks, you will not deny that Italian stocks are still historically undervalued http://yhoo.it/1gkGbd9;
    The FTSE.MIB has risen from 14000 to 20000, but it is still under the low of 2002 with 21700 and far lower than in 1997, when it was at 24000

    4) Coming to P/E ratios: You are saying that the Italian PE ratio is 29. You probably know why Shiller uses the 10 years average and not a single year. Due to the austerity measures, households savings rate has rapidly risen from 4% to over 10%. Italian companies are quite focused on local and European consumers. Austerity in 2012/2013 has severely hit, the 29 is hence an out layer that over the years will get better.
    For the U.S. it is different: Given that the Fed forced Americans to spend via QE, the American P/E ratio of 18 is relatively high. I would rather short U.S. stocks than Italian ones.

    5) You may remarked that Germans started spending and investing recently. As opposed to Italians, Germans do not need to do austerity. Italian exports to Germany are increasing now. But in 2012/2013 Germans did neither invest or spend, the Italian P/E ratio was 29.

    6) Wage expectations are far more important for stock valuations than P/E ratios. For years Emerg. Markets stocks have not risen for years. They have low P/E ratios and seem to be interesting, but high pay rises and the expectation of further pay rises destroys their future profits and their share prices.
    More here: http://bit.ly/1gkGbtn

    7) Another point are Italian banks. With the LTRO they were able to buy Italian gov. bonds at yields of 5-6%. They have made an enormous profit on it. On their balance sheets, bonds are probably not valued MTM, but held to maturity and valued at purchasing price. This weakens (declared) earnings of banks. One of the biggest banks, Unicredit, has huge income from its German subsidiary. For banks the real P/E should be much better.

    8) Another flaw: Saying German house prices are in a bubble. Please compare price to income ratios since the 1990s, e.g. in the Economist http://econ.st/OmSUOQ and you will understand that rather the U.S. and the UK have overvalued house prices, but not Germany.

    I admit that everything depends if Italian employees are ready to renounce on wage increases. The Scala Mobile will not come back that soon.

    A second condition is that the Italian housing market does not contract too much. But as opposed to other countries (e.g. Spain), there was no big housing bubble in Italy.
    Feb 20 07:32 AM | 4 Likes Like |Link to Comment
  • Yes To A Swiss Referendum Against Mass Immigration Is A Yes To Higher Salaries And Inflation [View article]
    The article is about FXF, the Swiss Franc and monetary policy of the central bank, partially about EWL and FSZ, the ETFs for the Swiss market.
    Macro data is often far more important for stock valuations.
    Feb 16 02:26 AM | 1 Like Like |Link to Comment
  • Yes To A Swiss Referendum Against Mass Immigration Is A Yes To Higher Salaries And Inflation [View article]
    True that services and goods that sold locally and potentially subject to tariffs, are more expensive, e.g. the famous Big Mac Index.
    As soon as you compare tradable goods, Swiss profit of lower taxes, innovation and investments. Suddently CHF is not really overvalued. Read more on Purchasing Power Parity http://bit.ly/1cbHR9m
    Remember that unit labor costs are only a part of production costs.
    Feb 16 02:21 AM | 1 Like Like |Link to Comment
  • Gold pushes SNB to $10B loss in 2013 [View news story]
    Remember that the SNB had 40 billion CHF gains on gold between 2000 and 2012.
    A 15 bln. CHF loss may happen after this long winning streak.
    Details: http://bit.ly/1iJBVsi
    Jan 6 10:58 AM | 4 Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    I strongly agree to what you are saying. A strong currency means a strong economy. Chinese, even Swiss leaders (see our site http://snbchf.com) , want a stronger currency over time, but simply not too quickly.
    That China slowed after European austerity is a typical sign that the economy is still driven by exports (and investments that reuse the export gains).

    The Japanese trade deficit is a pure oil deficit, since they completely stopped nuclear energy. Without Fukushima there would be no trade deficit and the yen would be 10% to 20% stronger despite Abenomics.
    Jan 3 05:33 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    I do not agree. Last June, emerg. mkts were still hampered with the slowing European demand due to austerity. Their currencies tumbled and gold tumbled with them.
    Fed's exit from tapering will be very smooth and slow so that EM currencies will not be hit. Reason: Growth in EM and in Europe will have picked up till then.
    You have seen this with the first taper, Indian INR nearly did not move at all. It is still at 62, far under the lows of 70 of the summer.
    Jan 3 05:26 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    That money supply leads to inflation is the Austrian idea and possibly true over the very long-term. See here even a recent Cleveland Fed paper that sustains it.
    http://bit.ly/1khzYVG
    Emerg. Mkts. have inflation rates of 4% to 10%, and Western economies between 0 and 2%. Most important reason: wages that rise far more.
    Jan 3 05:17 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    As I explain above, the fear factor 3, is only one out of six. Between 2000 and 2008, factor 6, physical demand from emerg. mkts and factor 1, correlation with other commodities like oil prevailed.
    As for these two factors, gold might go far higher than $1900 when China one day will overtake the US
    Jan 3 05:04 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    Always remember that all EM are in a similar situation as the US in the 1970s. Stocks may move sidewards for years, because profits rise less than wages. Developed market stocks are seeing higher profits and stagnating wages, but this will not be always the case. Inflation will be come http://bit.ly/1cOJX1h

    I am not a friend of Brasil, but rather of Asian economies coz of differences in crime, corruption, etc.. Brasilian data was surprisingly better than I expected.
    Why I am bullish on EEM is that they are reducing trade deficits. But it will take a lot of time when wages are still rising.

    Take the example of Malaysia (where I am currently in holidays), wages in 2014 are supposed to rise 5.7% instead 6.6% in 2013. Inflation is 3%, the difference is sometimes called innovation or productivity gains.
    Jan 2 06:01 PM | 1 Like Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    China is ramping the renmimbi as competitor to the US dollar. The day that it is allowed to free float is not far. As such this is a big competition to gold, because it represents two things:
    1) Exposure to the leader of current and future growth
    2) Price stability because Chinese policies (e.g. gov. suppresses wage increases) and mentality (e.g. high savings rate) sustain continuing trade surpluses, low inflation and an appreciating currency.

    There is no real need to back the renmimbi with gold, because (2) implies already that the renmimbi is as good as gold. If they back it with gold would create an enormous investor demand and the renmimbi would unnecessarily appreciate, a thing what leaders always wanted to exclude. So I strongly doubt what you are saying.

    The central bank does conservative hedging, it buys USD and more and more EUR (http://bit.ly/190q3i2).
    Jan 2 05:51 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    I am of the opinion that 2010/2011 was somehow an upwards manipulation of the gold price, I called a gold bubble.
    This is not what you might call a manipulation, but with all fund managers and firms invested in emerging markets and in gold, but not in the U.S.
    In 2013 we have seen the opposite: suddenly the money moved into the U.S., U.S. firms invested again.
    Investors are like lemmings, this is only the manipulation.
    Jan 2 05:38 PM | 1 Like Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    Maybe you overread it:
    "restrictions and tariffs on gold purchases (e.g. in India)"
    and this is also my biggest concern why I think that gold has not bottomed out yet.
    The wage-price spiral in India has not finished yet. High inflation and current account deficits in India will continue. (Same btw for Indonesia and lower surpluses in Russia). The Indian government is trying to prevent deficits, a weak currency and even higher inflation caused by "unnecessary" gold imports.


    These deficits
    Jan 2 05:28 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    I know that argument to which I partially agree. Still food is only 12% of the shopping basket, more details how inflation figures are kept artificially low here. http://bit.ly/1cOJX1h
    Jan 2 05:25 PM | 1 Like Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    The weak participation rate is a reason why I think that the Fed will the unemployment fall under 6% or even 5% without hiking rates.
    Jan 2 05:21 PM | Likes Like |Link to Comment
  • The Fed Will Remain Gold's Strongest Supporter For Years [View article]
    Thanks for the clarification. I expected low inflation in 2014 for two reasons: US wage increases will be small, current account surpluses and growth in many emerging markets will be subdued.
    This implies that gold has not bottomed out yet.
    However the Fed will continue to support the gold price for many years, no just in 2014.
    Jan 2 05:19 PM | Likes Like |Link to Comment
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