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We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.

The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.

The US Dollar has long been the world’s number one denomination in world currency supply. It represents 62% of total holdings in foreign exchange in central banks around the world. But, it is in for a tough race from up-and-coming strong currencies. The Japanese Yen and the Chinese Yuan are both giving the Americans a good run for their money. The Swiss franc is too (surprisingly). There is $6 trillion in foreign exchange holdings around the world at any given time, on average and the US Dollar represents almost two-thirds of that.

The fact that Brazil and China have also just signed a currency-swap deal worth something to the tune of $30 billion stands as living proof that the dollar may be further on the wane. China will exceed all expectations in the future as the world’s largest economy. The US will be overtaken. The Chinese currency will one day overtake the Dollar too. Has to be!

Although, it’s not quite there for the moment. China is not near being the world’s reserve currency yet. In order to be the world’s reserve currency there would be the need to produce enormous quantities of what the world wants. China has got that one off pat already. Then, countries holding the reserve currency would need to be able to spend that currency elsewhere in other countries or find a place to put it while waiting to do so. World capital markets are currently in dollars (40%), which means that there would be no possibility of using the Chinese currency. But, that’s only a matter of time. Some are predicting this will happen pretty soon.

The Federal Reserve has come in for some strong criticism over the unconventional Quantitative Easing methods that have resulted in 3 trillion spanking new dollars rolling off the printing presses. This has certainly brought about some degree of worry around the world that the dollar is not quite as safe as it might have been thought to be in the past. Is the world worrying that the dollar is not as safe a bet as it used to be in world domination. Are central banks worried that it will shrink in the wash and the colors will run?

Some are predicting that the dollar will shrink rapidly over the next two years and it will lose its top place as the world’s reserve currency by 2015. In the 1950s the dollar was 90% of total foreign currency holdings around the world. The dollar has definitely lost out to other currencies that are stronger. If there is a continued move and the dollar shrinks, then the resulting catastrophe that will ensue will have a spiral effect on the already enormous US budget deficit (over $1 trillion a year on average).

The only reason the Federal Reserve has been in a position to print more money recently is simply because they are in the strong position to be able to do so as the world’s leading reserve currency. If that changes, then the Americans won’t have the possibility of just hitting the button and setting the printing presses rolling. That means the US will be in no other position than to end up having to pay their debt back.

The US economy and the market are starting to show signs of recovery. Signs. It’s not sustained, hope as they might. If the dollar loses its attraction, then it won’t be used as the international reserve currency. Businesses will start using another currency and the dollar will lose out further still.

Some experts are saying that the problems of the dollar are like a time-bomb ready to explode. Ultimately, it will bring about the death of the dollar. As we stand on and watch, huddled around the coffin as it is lowered into the ground, we know it’s all too late. The flowers have been sent and the Stars and Stripes has been played in recognition of loyal service for the nation.

The QE methods are nothing more than aiding and abetting the already problematic situation of the greenback. We might look back in years to come and reminisce over whether it was the right (long-term) solution to use QE, whether printing bucks sent the greenback to an early grave, or whether it just reached the end of its life and croaked peacefully without making too much noise.

But, criticism of and worry over the dollar and its longevity have been hot topics for years now. The US dollar is a fiat currency that can easily lose status, deriving its value from government regulation and law. But, then again, so is the Euro. So, people living in Europe shouldn’t start throwing stones…they live in glass houses too…and that’s before they start.

Originally posted: Death of the Dollar

You might also enjoy: You’re Miserable USA! | Emerging Markets: Lock, Stock and Barrel | End of the Financial World 2014 |  Kristallnacht on Wall Street? Bull! | China’s Credit Crunch | Working for the Few | USA:The Land of the Not-So-Free  

 

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/contributed/2014-02-05/death-dollar

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Download GoldCore Outlook For 2014

CONTENTS
– Introduction
– Review of 2013
– Gold and Silver Have Torrid Year – Fall 27% and 35% Respectively
– Year Of Paper Selling But Robust Physical Demand – Especially From China
– Highlights Of Year – German Gold Repatriation, Record Highs In Yen, Huge Chinese Demand
– Lowlights Of Year – Massive Paper Sell Offs in April/June and Cypriot Deposit Confiscation
– Syria and the Middle East
– U.S. Government Shutdown and $12 Trillion Default Risk
– Continuing Central Bank Demand
– Regulatory Authorities Investigate Gold Rigging

Outlook 2014
– Geopolitical Tensions – The Middle East, Russia, China, Japan and the U.S.
– Ultra Loose Monetary Policies Set To Continue with Yellen as New Federal Reserve Chair
– Eurozone Debt Crisis Again – UK, U.S. Japan and China Also Vulnerable
– Enter The Dragon – Chinese Gold Demand Paradigm Shift To Continue
– Death Of Indian Gold Market Greatly Exaggerated
– Long Term (2014-2020) MSGM Fundamentals

Conclusion

Introduction
Happy New Year. We would like to take this opportunity to wish our clients and subscribers a prosperous, healthy and happy 2014.

With 2013 having come to a close, it is important to take stock and review how various assets have performed in 2013, assess the outlook in 2014, and even more importantly, the outlook for the coming years.

2013 was the year of the speculator and the year of the risk asset, such as equities, with global stocks doing well in the sea of liquidity and cheap money created by central banks.
Surprisingly to many gold bulls, these favourable monetary conditions did not lead to higher precious metal prices. Gold and particularly silver had a torrid year and significantly underperformed the vast majority of equity and bond markets.

The MSCI World Index was up 23% and the S&P 500, the Nasdaq and the FTSE were up 32%, 35% and 14% respectively.

MSCI World Index – 1970 to January 3, 2014 – Bloomberg

Bond investors did not fare as well as interest rates began to rise from all-time record lows. As bond prices fell, interest rates rose. The bellwether 10-year Treasury note closed the year at 3.028%, which was up from 1.76% at the start of 2013 and the highest since July 2011.

US 10 Year Note – 1964 to January 3, 2014 – Bloomberg

The Barclays US Aggregate bond index, which is dominated by Treasury, mortgage and corporate bonds and is the leading benchmark followed by institutional money, is set to record its first negative year of total returns since 1999. The bond market’s major benchmark registered a total return of minus 2.1% for 2013. It is only the benchmark’s third annual negative total return since 1976, according to Barclays.

REVIEW OF 2013

Gold and Silver Have a Torrid Year – Fall 28% and 36% Respectively
Gold fell in all major currencies in 2013 and fell 28% in dollar terms for its first annual price fall since 2000. Gold fell 40% in pound terms, 45% in euro terms. Gold fell much less in Japanese yen terms and was 16% lower in yen as the yen continued to be devalued and debased.

Silver was down by 36% in dollar terms and by more in the other currencies; silver had its poorest annual performance since 1984.

Gold came under pressure in the first half of 2013 and saw falls from near $1,700/oz at the start of the year to $1,180/oz by mid-year. Indeed, gold’s low for the year took place on June 28th, which was the last day of trading in Q2, and an important time frame for those evaluating gold’s longer term performance.

The price falls in the first half took place despite a positive fundamental backdrop and despite the risk of contagion in the Eurozone – especially from Spain, Italy and Greece. This risk was so great in the early part of the year that it led George Soros to warn in February that the Eurozone could collapse as the U.S.S.R. had.

In March, Cyprus was the first country to experience a bank bail-in of depositors, where both individual and corporate account holders, experienced capital controls and a confiscation of nearly 50% of their deposits. In June and then again two weeks ago, the EU confirmed that depositors will be bailed in when banks are insolvent.

International monetary and financial authorities globally, including the ECB, the Bank of England and the Federal Deposit Insurance Corporation (FDIC), have put in place the regulatory and legal framework for bail-in regimes in the event of banks failing again.

Are Your Savings Safe From Bail-Ins

Gold saw a bit of a recovery in the third quarter with gains in July and August as gold interest rates went negative, bullion premiums in Asia surged and COMEX inventories continued to fall. Silver surged 12% in 5 trading days in mid August due to record silver eagle coin demand and ETF demand.

UK gold ‘exports’ to Switzerland increased greatly during the year due to demand for allocated gold in Switzerland due to Switzerland’s tradition of respecting private property throughout the centuries and its strong economy. However, more importantly, UK gold exports to Switzerland were due to the significant increase in store-of-wealth demand from China and many countries in Asia.

Institutional gold in the form of London gold delivery bars (400 oz) was exported to Swiss refineries in order to be recast into one kilogramme, 0.9999 gold bars used on the Shanghai Gold Exchange and in the Chinese market.

However, this was not enough to prevent further falls in the final quarter and in recent days when gold has again tested support at $1,200/oz.

Year Of Technical, Paper Selling But Robust Physical Demand

German Gold Repatriation
The year began with a bang, when news broke on January 17 that the German central bank was attempting to repatriate Germany’s gold reserves. The Bundesbank announced that they will repatriate 674 metric tons of their total 3,391 metric ton gold reserves from vaults in Paris and New York to restore public confidence in the safety of Germany’s gold reserves.


Bundesbank – Goldbarren

The repatriation of only some 20% of Germany’s gold reserves from the Federal Reserve Bank of New York and the Banque of Paris back to Frankfurt was meant to allay increasing German concerns about their gold reserves. But the fact that the transfer from the Federal Reserve is set to take place slowly over a seven year period and will only be completed in 2020 actually led to increased concerns. It also fueled concerns that the unaudited U.S. gold reserves may be less than what is officially recorded.

What was quite bullish news for the gold market, saw gold quickly rise by some $30 to challenge $1,700/oz. The news was expected to help contribute to higher prices but determined selling saw gold capped at $1,700/oz prior to falls in price in February.

Paper Selling On COMEX
Gold’s falls in 2013 can be attributed in large part to paper selling by more speculative players on the COMEX. This was graphically seen in April when there was a selling raid on the COMEX which led to a huge price fall of nearly 15% in two days prior to the emergence of “extraordinary” demand for gold internationally.

The sell off came as demand in Europe began to pick up due to concerns that the Cypriot deposit confiscation may be a precedent that could be seen in other EU countries.

The speed and scale of the sell off was incredible and even some of the bears were surprised by it. Many questioned the catalysts for the $150 two day sell off. The sell off was initially attributed to an unfounded rumour regarding Cyprus gold reserve sales – this was soon seen to be a non-story. The Cyprus rumour did not justify the scale of the unprecedented sell off.
Reports suggested that a single futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting. The futures market then saw a further wave of selling of contracts worth some $15 billion, equivalent to 10 million ounces of selling or 300 tonnes, in just 35 minutes.
Gold futures with a value of over 400 tonnes were sold in a handful of trades in minutes. This was equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions.

Investment banks and hedge fund speculators can manipulate the paper or futures gold price in whichever direction they want in the short term due to the massive leverage they can utilise. The events in April further bolstered the allegations of manipulation by the Gold Anti-Trust Action Committee (GATA).

Significant Demand For Physical Gold Globally
Gold prices fell very sharply despite very high demand. However, the gold price decline was arrested by the scale of physical demand globally. This demand was particularly strong in the Middle East and in Asia, particularly China but was also seen in western markets with government mints reporting a surge in demand in 2013.

This demand for physical gold was seen in western markets throughout the year. In April, the US Mint had to suspend sales of small gold coins; premiums for coins and bars surged in western markets due to high demand.

Mints, refineries and bullion brokerages were quickly cleared out of stock in April and COMEX gold inventories plummeted. There were gold and silver coin and bar shortages globally.

This continued into May as investors and savers globally digested the ramifications of the Cypriot deposit confiscation. The crash of the Nikkei in May also added to physical demand in Japan and by nervous investors internationally.

This led to all time record gold transactions being reported by the LBMA at the end of May.

Chinese demand remained very robust and Shanghai Gold Exchange volumes surged 55% in one day at the end of May – from 10,094 kilograms to 15,641 kilograms. There were “supply constraints” for gold bars in Singapore and bullion brokers in Singapore and India became sold out of bullion product at the end of May.

This, and concerns about a very poor current account deficit and a possible run on the Indian rupee, prompted the Indian government to bring in quasi capital controls and punitive taxes on gold in June. Ironically, this led to even higher demand for gold in the short term and much higher premiums in India. Longer term, it has led to a massive surge in black market gold buying with thousands of Indians smuggling in gold from Bangkok, Dubai and elsewhere in Asia.

June saw another peculiar sudden 6% price fall in less than 24 hours. This again contributed to increased and very robust physical demand. U.S. Mint sales of silver coins reached a record in the first half of 2013 at 4,651,429 ounces and the UK’s Royal Mint saw a demand surge continuing in June after demand had trebled in April.
Asian markets continued to see elevated levels of gold buying. Gold demand in Vietnam was so high that buyers were paying a $217 premium over spot gold at $1,390/oz. Premiums surged again in China as the wise Chinese ‘aunties’ and wealthy Chinese continued to buy gold as a store of wealth.

Despite very high levels of demand for gold, in Asia especially, gold languished and sentiment in western markets continued to be very poor with gold falling to the lows of the year on June 28th.

July saw continuing strong demand for gold internationally as volumes surged to records on the Shanghai Gold Exchange (SGE). Premiums rose and feverish buying left many of Hong Kong’s banks, jewellers and even its gold exchange without enough gold bullion to meet demand.

In August, demand remained elevated and gold forward offered rates (GOFO) remained negative and became more negative. This showed that physical demand was leading to supply issues in the highly leveraged LBMA gold market or the institutional gold bar market.

Today, as we enter the New Year gold, forward offered rates (GOFO) remain negative, meaning banks, which had lent their customers gold to obtain a positive return, and therefore increase the “paper” gold supply, will take the gold back. This should limit the amount of gold on the market and increase the gold price.

Chinese buyers are of increasing importance but it is important to note that physical demand rose significantly throughout the world in 2013 despite falling prices. This is seen in the levels of demand experienced by leading bullion dealers, refiners and government mints. This is clearly seen in the data released by the Perth Mint and the U.S. Mint which both saw increased demand for physical gold coins and bars in 2013. Other mints have yet to report their numbers.

The Perth Mint of Western Australia reported yesterday that they saw a very significant increase in sales in 2013 despite the falling prices. Gold sales from the Perth Mint, which refines most of the bullion from the world’s second-biggest producer Australia, climbed 41% last year.

Sales of gold coins and minted bars totalled 754,635 ounces in 2013 from 533,333 ounces a year earlier, according to data from the mint.

Silver coin sales surged 33% to about 8.6 million ounces from 6.5 million ounces in 2012, according to the Perth Mint.

Gold bullion sales expanded 12% to 58,944 ounces in December from 52,700 in November and about 51,778 ounces in December 2012, according to data from the mint. Gold sales fell to as low as 30,430 ounces in August and peaked at about 112,575 in April, when gold was hammered 14% lower on the COMEX in just two days.

Silver coin sales were 845,941 ounces last month from 807,246 in November and 452,389 a year earlier, it said.

The U.S. Mint also saw an increase in physical gold sales and sold 14% more American Eagle gold coins last year and sales climbed 17% to 56,000 ounces in December from November, according to data on the mint’s website as reported by Bloomberg.

Syria and the Middle East
Even bullish developments such as the prospect of war in Syria at the end of August, only led to small, short term price gains. War in Syria and in the Middle East, pitching the U.S. and western allies against China and Russia was expected by many to lead to “market panic” and to propel gold “much, much higher,” in the words of astute investor Jim Rogers.

Only the fact that President Obama and the U.S. were confronted with opposition by people internationally against another war and were outmaneuvered diplomatically, prevented the war with Syria.

The war had the potential to destabilise the region with ramifications for oil prices and the global economy.

U.S. Government Shutdown and $12 Trillion Default Risk
Another very bullish development for gold came in late September and early October with the U.S. budget negotiations and government shutdown.

They highlighted the dire U.S. fiscal position and the complete failure of the American political and economic class to deal with their extremely precarious financial position in any meaningful way. The U.S. government is essentially bankrupt with a national debt of over $17 trillion and unfunded liabilities of between $100 trillion and $200 trillion.

In the coming months and years, it will lead to a lower dollar and much higher gold and silver prices.

However, in the year of paper gold selling that was 2013, even this did not lead to higher gold prices.

Continuing Central Bank Gold Demand 
All year, central banks continued to accumulate gold with Russia, Kazakhstan, Azerbaijan, Kyrgyz Republic, Turkey and other central banks continuing to diversify their foreign exchange reserves.


U.S. Federal Reserve employees in underground vault holding monetary gold

Central banks continued to be strong buyers of gold in 2013, albeit the full year data may show demand was at a slightly slower rate than the record levels seen in recent years. Q4 2013 will be the 12th consecutive quarter of net purchases of gold by central banks.

Total official central bank demand continued at roughly 100 tonnes every single quarter. However, this does not include the ongoing clandestine and undeclared purchases of gold by the People’s Bank of China. Conservative estimates put PBOC demand at 100 tonnes a quarter or at over 400 tonnes for the year. More radical projections are of demand of over 1,000 tonnes from the PBOC in 2013.

Regulatory Authorities Investigate Gold Rigging
Peculiar, single trade or handful of trades leading to sudden gold price falls were common in 2013 and contributed to the 28% price fall.

Therefore, those who have diversified into physical gold will welcome the move by the German financial regulator BaFin to widen their investigation into manipulation by banks of benchmark gold and silver prices. In December, the German banking regulator BaFin demanded documents from Germany’s largest bank, Deutsche Bank, as part of a probe into suspected manipulation of the gold and silver markets.

The German regulator has been interrogating the bank’s staff over the past several months. Since November, when the probe was first mentioned, similar audits in the U.S. and UK are also commencing.

Precious metal investors live in hope but their experience of such investigations is that they are often very lengthy affairs with little in the way of outcome, disclosure or sanction. The forces of global supply and demand, one anemic, the other very high, are likely to be more important and a valuable aid to gold and silver owners in 2014 and in the coming years. As ultimately, the price of all commodities, currencies and assets is determined by supply and demand.

Janet Yellen Becomes Fed Chair

At year end came confirmation that cheap money uber dove Janet Yellen was set to take over from Ben Bernanke as Chair of the Federal Reserve. Gold bulls cheered loudly at her appointment thinking that Yellen’s appointment would lead to a recovery in oversold gold prices. However, even this bullish development did not help embattled gold prices.

OUTLOOK FOR 2014

Introduction

2013 was a year of calm in the world of finance. 2014 may not be so calm and there is a risk of renewed turbulence on global financial markets. There are many unresolved risks which were present in 2013 but did not come to the fore and impact markets as they could have.

The Eurozone debt crisis is far from resolved and there remains an underappreciated risk of sovereign crises in other major industrial nations.

There are far more positives for gold than negatives and the positives include ultra-loose monetary policies, risk of sovereign and banking debt crises and systemic or contagion risk, the increasingly uncertain political and military situation globally and of course increased demand for gold from the Middle East, much of Asia and particularly China.

Download GoldCore Outlook For 2014

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/contributed/2014-01-04/good-bad-and-ugly-gold-2013-and-outlook-2014

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SocGen has published a fantastic, must read big picture report, which compares the world in the 1980/1985-2000/2005 time period and juxtaposes it to what the author, Veronique Riches-Flores predicts will happen over the next two decades years, the period from 2005/2010 to 2025/2030. Unlike other very narrow and short-sighted projections, this one is based not on trivial and grossly simplified assumptions such as perpetual growth rates, but on a holistic demographic approach to perceiving the world. At its core, SocGen compares the period that just ended, one in which world growth was driven by an expansion in supply, to one that will be shaped by an explosion of demand. And, unfortunately, the transformation from the Supply-driven to the Demand-driven world will not be pretty. Summarizing this outlook: “Over the last three decades strong growth in the working-aged population across Asia and the opening-up of world trade have led to considerable expansion in global production capacities. These factors created a highly competitive and disinflationary environment of plentiful supply, which was characterised by low interest rates, a credit boom and, in the financial markets, exuberant appetite for risky assets. As the demographic cycle progresses, we are seeing the emergence of an aging population, which is less favourable to productive investment. Meanwhile the rise in living standards among the emerging population heralds an unprecedented level of growth in demand. The world supply/demand balance is dramatically changing against a backdrop of resource shortages which are likely to favour shorter cycles, increased government intervention in economic affairs and inflation.” In other words, contrary to what you may have read elsewhere, the future is about to get ugly. And topping it all off is a Kondratieff cycle chart: what’s not to like. Read on.

Visually comparing the two proposed world paradigms:

The world was characterized by a very defined demographic transformation which served as the underpinning of a production capacity explosion:

A rise in the working age population, which provides labour and growth in demand and savings, has always coincided with economic prosperity. This trend, which economists describe as the “demographic dividend” of the first phase of transition from a primitive or  stationary demographic structure, with high birth and death rates, to a developed demographic structure, translates in economic terms into a very strong urge to invest, which is the main source of economic development. The countries of Asia excluding Japan reaped  spectacular rewards from this demographic transition: between the mid-1980s and the present their rate of investment has increase by the equivalent of more than 10% of the region’s GDP and industrial potential has considerably increased. The surge in investment that began in Southeast Asia has over the last 15 years focused predominantly on China.

Yet demographics must be taken in conjunction with the other core feature defining the world since 1980: the literal New World Order, predicated by the opening of the world to “free trade.”

This transition would not have been so great, nor would it have had the global implications it has had, if it hadn’t been accompanied by the opening-up of world trade due to progress in international negotiations which first brought the GATT agreement and then the WTO, with the aim of optimising resources by making better use of competitive advantages.

In a progressively open world, Asian countries drew increasing benefits from their comparative advantage. The sudden abundance of very low cost labour created the conditions for an unprecedented rise in competition on the world labour market which brought even more investment into the region. What these trends did was to bring about a profound shift in the world’s production and labour balance and a radical change in the economic model that was previously in force. Because, although there had always been cost differences from one country to another, access to a globalised market provided the opportunity of exerting more influence than ever before. The liberalisation of trade gave the Asian demographic transition a dimension comparable to that which brought about the same phenomenon in Europe a century earlier, albeit in Europe’s case the scale was far smaller.

Thus the population boom of recent decades triggered, not a substantial rise in demand, as one might at first expect, but a massive increase in supply as a result of the unprecedented expansion of the global production base. Given that the purchasing power of workers in the emerging Asian countries has, up until recently, been too limited to have any real influence on world demand, average global investment per capita continued to grow faster than real consumption in the region between the mid-1980s and 2007, with the gap peaking at almost 40% over the period.

Naturally, just these two drivers did not nearly come close to explaining the hospitable environment for global growth:

These fundamental characteristics have been reinforced by innumerable other economic, political and cultural revolutions which all aided the development of supply: the end of communism and consequently the expansion of the capitalistic model, privatisations and the widespread decline of state intervention, deregulation in most of the major sectors of economic life, the accelerated development of the financial markets, the revolution of communication technologies. All of these factors contributed to an environment shaped by abundant supply, where increasing competition meant that the least competitive were doomed to fail and all sustained prices rises were eradicated. While the central banks congratulated themselves for having kept inflation under control over the years, we can see that they had a good deal of help from the underlying economy. By restricting access to excess liquidity for the goods markets, the context made it a lot easier for the central banks to control the scourge of inflation. Meanwhile disinflation led to a structural weakening in interest rates which was highly beneficial for the conditions underlying global supply… until it eventually led to the financial excesses that caused the crisis in 2008.

This combination of factors created an environment that was particularly favourable for all asset classes, company assets in the first instance, and then credit, bonds and property assets.

While the expansion of the production platform took place primarily in Asia, it was the West that enjoyed the improvement in return on capital. In a hyper-competitive environment, productivity gains improved in proportion to job weakness and, in a context characterised by a structural decline in capital stock and weaker economic growth, this produced a marked improvement in yield on the latter.

Overall these shifts meant that in the universe of large corporations an increasing part of the added value went towards profits and this, combined with a very strong dividend distribution policy, goes a long way towards explaining the paradox of recent years where structurally weak economies and very strong capital market profitability lived alongside each other for so long.

So that was then. And it lead to what can only be described as log growth in all aset classes: we will not insult readers’ intelligence by showing a graph of the S&P from 1980 to 2005.

What is next?

SocGen does not sugarcoat it:

The unprecedented economic and financial crisis of 2008 has abruptly altered the course of history and there is no doubt that its effects will have a sustained influence on future developments. However, the crisis itself represents the expression of the end of the excess created by the previous situation and its consequences should play only a secondary role in comparison to the powerful structural changes that are currently sweeping across the globe, namely changing demographic trends, the explosion of demand in emerging countries and the resurgence of physical constraints to growth.

The shift in the global demographic structure that has characterised the last three decades is now coming to an end. Although the global population is expected to continue to grow significantly in the future, with the nine billion threshold likely to be reached in 2040  according to the UN’s latest projections, a third of this growth will be attributable to the expansion of the elderly population, in the developed countries of course, but also in a good number of emerging countries, and particularly Asia.

The biggest demographic change is without doubt the aging of global, both developing and developed, society. This also explains the special role insolvent entitlement structures which are supposed to ensure retirmenet and pensions for ever more people, have in the eyes of current governments:

By 2030, the portion of working age people in the industrialised countries is expected to have fallen by more than 5%, from more than 67% of the population today, to 62%. By contrast, the over-65s are expected to climb from 16% to 22.5%. In Asia excluding Japan, the over-65s are expected to account for 36% (277 million) of the population increase, after having accounted for less than 10% of the increase observed over the previous 30 years. In the region, the portion of working people in the total population will stop growing when the Chinese population embarks on a similar decline to the one projected for the developed countries starting in 2010.

The below should be the first refutation of any brainless idiotic argument which sees the Dow at 20,000 in the near future (absent  hyperinflation of course, in which case the Dow will be at 20 billion but be completely worthless).

The economic implications of population growth resulting from an increase in working aged adults in the first case and an increase in over-65s, in the second, are naturally not comparable. While in the first case, the demographic shift favours structural development, in the second case it weighs on development.

The causes are largely understood in the developed countries where the population has already aged considerably. In this case nevertheless, the negative effects that the aging population has on savings and the urge to invest are likely to be accompanied, or even preceded by at least a proportional decline in growth of structural demand, especially in the current context of widespread household/government over-indebtedness. With revenues at least a third lower than those of the working population, the retired population consumes considerably less than the average adult and is far more vulnerable to debt and asset depreciation than younger households. The combined effects of over-indebtedness, property market decline and widespread fiscal tightening are thus likely to be greater in terms of pressure on demand than the effect of demographic aging on supply.

A longer-term demographic snapshot:

By 2030 two-thirds of the needs of the global population will emanate from the emerging world, the population of which is expected to approach seven billion and the economic weight of which is set to double in comparison to today’s level.

The punchline:

So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today’s North American, European and Japanese consumers.

Summarized what does this mean: said simply, an explosion in needs manifesting in a huge demand, and shortage, for all sorts of products, both raw and finished.

The global auto market

In 2010 the global auto fleet stood at approximately one billion vehicles. However, based on the increase in revenues per capita and fairly conservative assumptions relating to the increase in equipment ratios in the main emerging countries, the level should  spontaneously double by 2030.

To satisfy these new needs, production is going to have to grow at an average rate of 3.5% per annum over the next 20 years, compared with an average annual growth rate of 2.5% over 2002-2008. Although this may not seem too far-fetched at first, we then have to add the renewal of the existing fleet which, based on an average vehicle lifespan that we estimate to be between 10 and 12 years, will have to be completely replaced over the next two decades. Thus, one billion expansion + 1.6 to two billion replacement, which means that, in comparison to the current level, production would actually have to triple rather than double in order to meet future demand, corresponding to an average annual growth rate of not 3.5% but potentially 4.4% (assuming a 10-year average lifespan of a vehicle) to 5.6% (10 year average lifespan) by 2030.

Metals and other inputs

Given that metal accounts for half of the weight of each new vehicle (54% exactly at present), the tripling of auto production between now and 2030 implies a threefold increase in demand for metals, steel alloys, light metals such as aluminium, and textiles, which are also used extensively in vehicle production.

Meanwhile in another field, namely construction, rapid urbanisation and the subsequent increase in tall buildings is also contributing to very strong growth in demand for steel. According to ENRC (Eurasian Natural Resources Corporation), buildings of over 16 floors, where steel intensity is twice as high as in buildings of less than six floors, are expected to account for more than half of all new Chinese constructions between now and 2020.

These few examples are not just the exceptions. At this stage many sectors are projected to encounter increased demand of similar proportions, as the change in lifestyles that accompanies the rise in living standards in the emerging countries affects demand for a considerable range of goods.

Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials.

The full report (below) indicates the same squeeze in agircultural products and in energy. Yet the take home message is clear: resource shortages are coming back with a vengeance as physical limits on growth once again appear.

Having disappeared from the economic landscape over the last century, resource shortages are back. This will create a particularly unstable environment in the long term, some of the characteristics of which we can already anticipate:

Structural increase in the cost of raw materials. A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we’re talking about industrial, energy or agricultural resources. Rather than asking which direction real raw materials prices are going, we must now ask how long it will take to erase the long period of price decline seen between 1980s and the 2000s.

Rise in cycle frequency and magnitude. Given that any sustained period of expansion would be likely to run into an ever increasing number of physical constraints as time goes by, cycle durations are likely to become significantly shorter. However, greater cyclicality doesn’t mean that the cycles will be smoother. On the contrary, in view of the factors underlying the increase in demand, the upward phases of the short cycles are likely to be particularly pronounced, triggering recurrent price swings which could act as an automatic stabiliser. Movements in the price of raw materials and their resistance and support points look likely to play a key role in the cyclical shifts of the period.

Rise in cost of capital and slowdown in productivity gains. For economic intermediaries and the investment community, a series of short cycles spells relative instability and reduced visibility. These characteristics are generally bad news for investment as risk-taking would need to be carried out against a backdrop of potential resource shortages. This observation raises questions over the future development of commodity supply despite the context of increasing demand, given that savings sources are declining due to population aging in wealthy countries and this is likely to lead to a shortage of capital supply and a proportional increase in cost of capital. None of this bodes well for company performance. The slowdown in productivity gains that has been observed in the developed countries for almost a decade now thus looks set to continue and to spread to the newly industrialised countries.

State intervention, regionalisation of trade. The underlying scarcity of resources could pave the way towards a resurgence in regulation, as already observed with the restrictions on the trade of raw materials recently imposed by a number of countries. A rise in tensions on the commodities market and a diminishing supply of capital will considerably increase the temptation for governments to become increasingly involved in the management of resources. While strong inter-dependence reduces the risk of a return to widespread protectionism, a significant shift towards the regionalisation of trade, as opposed to the globalisation seen over the last 20 years, seems highly likely. Given the level of interdependence and tension, developments in global governance will be vital, meaning that a stronger regulatory framework will be adopted in an increasing number of economic and financial domains.

And the two most important take home observations:

Return of inflation

The stage is set for the return of inflation. It is merely a question of time before the global inflationary movement gets underway. The realisation that the emerging countries will account for the bulk of the growth in demand does very little to change this conclusion in a world characterised by a high level of inter-dependence and one that is increasingly being driven by the rising influence of these new players. The fall in competition that has already been triggered by the asymmetric demand shock represents the most efficient catalyst for the proliferation of the global price rises that have already been evidenced by the rapid widespread increase in the international trade prices of manufactured goods.

Widespread increase in interest rates

The growing structural imbalance between supply and demand looks set to trigger a very pronounced rise in interest rates as time goes by. There is also a significant risk that this movement will be accentuated by the structural decline in savings capacities on a global level.

And nor for what everyone has been waiting for: what does this all mean for equity markets. Well, it’s not all that bad…

The rising power of the emerging economies comes at a high collective cost and raises many questions. To say that this picture does not evoke a scenario of harmonious growth would be an understatement. At the same time, neither does it necessarily evoke a depressive scenario.

Firstly, because as a result of these shifts many billions of people will gain access to an unprecedented level of development and revenues. Young countries with substantial natural resources will find themselves with a significant source of growth in a world of scant resources. Alongside the progress already made by Asia, this new environment will represent a powerful development platform for Africa, forming a trend that is already clearly under way.

Secondly, because long-term economic history shows that a certain level of constraint is needed to stimulate the innovation and transformation that has ultimately allowed mankind to progress. While it is clear that the innovation process is currently lagging behind the development of demand, it is the distortions created by this imbalance that should allow crucial progress to get the upper hand.

Finally, because the changes under way in the emerging world offer the developed world, with its aging and over-indebted population, the only true chance it has of avoiding the projected structural decline that it faces without this external impulsion. At the end of a 30-year process that began at the end of the 1970s with the realisation that, only by distributing wealth through the liberalisation of world trade could the global economy thrive in the long term, the circle is now complete and this is obviously welcome. The years of hyper-competition and flagging industrial employment are drawing to a close. While the decline in productivity gains may not bode well for corporate profitability, it nevertheless marks a radical shift in the environment for the employment markets of the developed countries which, combined with the growth opportunities offered by the emerging markets, provides them with a precious if not their sole support for future growth. What is more, the inflation that will accompany this global economic transition represents the only chance these countries have of reducing their enormous debt burdens in the long term.

The financial outlook for the coming years looks set to encounter all sorts of hurdles and sources of volatility, yet it is not irretrievably headed towards depression.

Alas, the sugarcoating quickly ends when one thinks realistically about things:

It is fair to say that shorter economic cycles, rising raw materials prices, the return of inflation and soaring interest rates undermine the medium-term outlook for the equity markets. Such conditions will no doubt cause continued uncertainty which will probably prevent the developed markets from finding their way for still several more years to come.

And the conclusion: the depression that the developed world lived through in the aftermath of Lehman is slowly shifting to the very same dynamo to carried the world across the abyss and has so far continued to push the global econmoy forward tirelessly.

Paradoxically it is the pressure that this new growth regime puts on the long-term performance of the emerging market capital markets that represents the biggest constraint to the development of the capital markets and their relative performance. The emerging markets have barely had time to absorb the changes that are currently taking place and, at this stage of their development, they would be far more vulnerable to problems created by high inflation.

However, if this were the case, then the characteristics of the Kondratien winter that should emerge in the developed world in the aftermath of the financial crisis could give way to a new Kondratief cycle dictated by the developments of the emerging world.

And yes, what look at the future would be complete without the good old Kondratieff cycle chart which sadly predict that we are now entering the last season of it all.

Indeed, winter will be marked by “concern, fear, panic and despair”; when there is virtually no credit following global credit crunch, when rates and vol fall due to a credit crisis, and when the only assets generating returns are gold, cash and bonds. This is the deflationary endgame, and the world’s central banks know it. Throughout history this terminal deflationary threat is what always forces money printing authorities to make their last stand against the end of the cycle, knowing full well the status quo would implode in a singularity of risk off‘ness, unless something is done. And that one something is always, without fail, the rampant printing of money to stave off deflation. Always. Without exception. Just open up a history book. And no. This time is never different.

Full SocGen report here:

When Demand Outstrips Supply – Copy

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/coming-new-world-order-revolution-how-things-will-change-next-20-years-kondratieff-cycle-per

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In another case of purely coincidental serendipity, three days ago Zero Hedge informed readers that the “NYSE Boerse [sic] has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else.” We concluded: “It is unclear if the ultra-speed, HFT friendly feed would be activated before its next release on June 30. That said, we will certainly coordinate with our friends at Nanex for any trading abnormalities, primarily in the critical ES futures, this Thursday at 9:42am, keeping a close eye on the tape, and indicating precisely when the tiered data release hits.” Well, as promised here is the Nanex data. As expected, it’s a stunner.

The shocker, however, resides not in the stock arena, but in what is now becoming the go to place for bulk frontrunning high frequency trading algorithms to chase what little volatility is left in the equity market: options, which, as previously noted, we now are confident will be the cause for the next big market wipe out.

Per Nanex:

Approximately 1/2 second before the 9:42 release of the Chicago PMI report, the option market exploded setting new records in quote rates, saturation, and delays. We have not yet determined why the equity market did not see a record explosion of quote traffic; rather it experienced the normal saturation/delay that happens all too frequently every trading day.

The electronic S&P 500 futures experienced a withdrawal of liquidity beginning about a minute before the release of the PMI number. At approximately 9:41:59.550, 1275 contracts cleared through 4 levels of the offer side of the order book. This coincided with the explosion in OPRA quote traffic.

The first image shows quote message rates for each of the 12 CQS data lines that carry data for NYSE, AMEX, and ARCA equities and ETFs in 2ms intervals. Notice how quickly activity drops after the peak compared to the OPRA images below it. Normally, options activity follows equity activity very closely.

The images that follow, show each of the 48 lines individually along with the total, so that you can clearly see the saturation events and estimate the duration and extent of the delay for each line. The flat-top areas you see on the charts are caused by something gating, or queuing the data. Since OPRA, like CQS, timestamps after data exits the queue — right before it’s transmitted to subscribers — it is impossible to know the exact duration of these hidden delays, but 500ms to well over 1 full second is a conservative estimate. We believe OPRA capacity would have to increase at least 3 times, to 12 million/second, in order to avoid these significant delays. However, at those message rates, a significant number of quotes would have already expired before they even left the exchange networks. (for all source images, please go to the Nanex site)

Several individual OPRA data lines show gaps which we believe are exhaustion events. These quiet periods of no quotes are common, can last 20 milliseconds, and almost always follow a spike in activity. We have verified that there were no drops in the data and that the charts accurately show the quote traffic rates. Several lines, noteably #37, show a period of fluttering between a high rate and zero which seem to appear during times of severe saturation.

While it is impossible to determine if this is indeed a case of broad embargo breach, it is imperative that Kingsbury International and the Deutsche Boerse immediately announce are precisely what moment they releasaed the PMI data to i) subscribers of Alpha Stream, and ii) to subscribers of the PMI service, who up until now thought they were getting a bargin by frontrunning the general population by three minutes courtesy of a public embargo, and now seems are themselves being frontrun by almost 500 milliseconds.

Furthermore, if no advance data release is confirmed, can OPRA please explain what the reason for this bizarro frontrunning activity is as traditionally a massive burst of trading action in advance of news dissemination indicates something is terminally broken with the checks and balances in the system. While we know that is the case, with the aid of Nanex, we will continue exposing each and every act of public data frontrunning going forward until every last retail investor is permanently out of the market and central banks and primary dealers can throw the hot ponzi grenade amongst themselves.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/caught-act-hft-option-algos-observed-frontrunning-todays-pmi-release

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