Hellmeyer Interview Part 2: The uber-bullish case for the global economy and real assets
by Lars Schall
Folker Hellmeyer, chief analyst at Bremer Landesbank, gave an exclusive interview to chaostheorien.de. Yesterday we ran the first part of that interview with his take on the so called “Currency Wars,”China’s role as a stabilizing factor in the world economy and the outlook for precious metals. Today we continue that interview concentrating on high frequency trading, precious metals, and oil. Hellmeyer makes the case for a secular increase in global inflation via commodity prices. Overall, he is quite bullish on the global economy and makes a very bullish case for growth in 2011 at the end of this interview.
Before we continue to talk about precious metals: what are your thoughts with regard to “fraudulent“ influences in the markets, for example via high frequency trading? Here’s a graph related to an estimate of the percentage of HFT trades by the market research and strategic advisory firm TABB Group:
Well, first of all, the same applies here as in the previous question: if you have a market place, you need all participants to have the same entrance barriers or entrance level. And high frequency trading is one of those measures that gives a very limited number of players certain advantages in comparison to all the other players. In this regard, high frequency trading needs to be abandoned as soon as possible, simply because it breaches the rules of a fair market.
What else can be said on that subject? We have created a situation where the global banking aristocracy, the big players, tend to get advantages in comparison to smaller players in the market. And if we want to maintain a free market and, ultimately, our democratic system, then these policies have to be altered.
I also want to put forward another question, and the question is: Why do stock exchanges and other market exchanges have to be privatized? Given the backdrop of the latest experiences in history, it shows that they don’t comply with the demands of a level playing field. Thus the privatization of these exchanges in my eyes has also partly led to the crisis we have seen, and it has to be decided whether these structures need to be managed by government rather than private entities.
Let’s return to gold. You are familiar with a story by Max Keiser and me: “Currency War: Germany about to lose 66% of its gold reserves.“ Should Germany worry about its gold holdings at the New York Fed now that, for example, some major central banks – as you’ve already mentioned – are out buying gold big time?
Well, in the first place, central banks should and do trust each other. In that respect, shifting gold reserves from the United States back to Frankfurt does not really seem to be necessary. Given the fact that we have problems with balance sheet positions of gold in the United States, whether it’s bullion reserve, custodial gold or deep storage gold, of course, there are some doubts.
I know from the Bundesbank that the gold at the Bank of England has been relocated to Frankfurt. That was back when I was at Helaba, running the central bank desk there. In that respect, parts of these reserves have definitely been shifted to Frankfurt.
I strongly recommend, if there is a rift between central banks because of inadequate policies – if we look at the policies between the ECB and the Federal Reserve, the rift is increasing – removing German gold from the US back to Germany, to Frankfurt.
Another aspect regards the way the Bundesbank’s bullion reserve has been verified by the Bundesbank in the past. If it is accounted for as reserves held in New York or at Fort Knox in a clear cut way and is verified on a regular basis, then you can, of course, keep this policy on. In the end, it’s a question of trust.
I prefer direct control by the Bundesbank rather than trusting somebody else. At this stage, I can neither affirm nor deny Max Keiser’s call on the situation nor the position of the Bundesbank. Generally I trust the Bundesbank, that the entirety of the reserves of roughly 3,400 tonnes is still available to the Bundesbank.
Yes, but shouldn’t there be a public discussion here in this country about this question?
There should be a public discussion about all central bank gold reserves. And the transparency that central banks require from other players in the financial arena should be fulfilled by central banks as well regarding bullion reserve. In that respect, yes, a discussion is meaningful. But obviously central banks do not wish intense scrutiny.
Like a former official of the Federal Reserve once said: “The first duty of a Central Banker is to tell the public the truth.”
Well, that is the American view of it. From my experiences with the Bundesbank, and also with the ECB, I know that this view is definitely not shared. Regarding bullion reserve, there are many question marks – whether with the BIS, with the Bundesbank reserve or with the U.S. reserve – whether they are still there or have been swapped and are simply financial receivables against mines or other financial players. We need transparency in order to avoid too much speculation. I don’t want speculation, I want clear investment.
What do you think about the initiative of the Gold Anti-Trust Action Committee, GATA (www.gata.org), for having an audit of their gold reserves in the U.S. – which would be the first since the days of President Eisenhower?
It is long overdue. I am very happy that we have a group like GATA that insists on this audit. And I am also very happy that we have GATA because GATA has been the best provider of news regarding bullion in general for the past ten years. I have been a reader of "Le Metropole Cafe" (www.LeMetropoleCafe.com) since, I think, 2002 and the best information that we have received within the bullion market has not been the information granted by banks and bullion banks in particular, but rather the information given by GATA and "Le Metropole Cafe" – which stands on its own.
So you appreciate the work of GATA in general – and it shouldn’t be dismissed as “conspiracy theories“ per se?
Well, I think that conspiracies are much more common than most people seem to believe. If you look at your office and there’s a nice, smart girl who wants to have the post of head secretary and there is another one who is very intelligent but less attractive, very often you see a kind of mobbing going on and mobbing is a conspiracy. If you take a look at chemical industries and just Google the word ‘cartel’ in combination, you see that here as well that conspiracy theories are comparatively common, as a cartel requires conspiracy. In that respect, conspiracies do have very good reasons for being discussed, and I would not put GATA and "Le Metropole Cafe" in the corner of conspiracy theories only. Rather, they delve into matters very, very deeply and present a very satisfying analysis of the information which implicitly shows that most of their claims are correct.
To say “this a conspiracy theory“ is a psychological tactic – well, it’s a conspiracy theory, don’t pay attention to it.
Indeed. Normally people who throw around the label ‘conspiracy theory’ want to bury discussion in order not to delve into the matter. Thus, people acting in this manner have to be seen with caution.
One last topic for our conversation: the development of the oil price. Mike Norman, the chief economist at John Thomas Financial (www.johnthomasbd.com), wrote the following to me last month:
"Current oil market fundamentals do not justify the price. Stocks of crude in the U.S. are just off record levels, yet the price is more than double a year ago. Same with gasoline. All speculation. Total NYMEX open interest in crude is 1.4 m contracts or about 1.4 billion barrels of crude. Daily volume of crude traded on NYMEX is over 1 billion barrels per day. Total daily global demand is only 83 million barrels per day. The amount traded on one single exchange is more than 10 times total daily consumption. It’s a giant casino with prices being driven up by speculators and consumers having to pay more and more."
Is Mr. Norman on the right track with this opinion?
Again, on the surface, this sounds very smart but it definitely is not. We trade foreign exchange for example. And most of the volume is speculative. Only about 1 percent of the trading volume of foreign exchange on a daily basis is backed by real trade. We could also say that the foreign exchange is a casino. But no; it’s a market where you have lots of interests, and which comes close to the status of a polypoly. That also applies to the commodities market for oil. In that respect, the amounts that have been traded are not that important.
Second, yes, the stocks of crude and gasoline may be at record levels in the United States, but the question is not whether they are at record levels in the United States; we trade oil and gasoline as a global commodity. When we look at other countries, the picture is different. Meanwhile, we should expect global growth of 4.8 percent according to the latest prognosis of the IMF- and next year of 4.2 percent. So what we are seeing here is that the market is anticipating an increase in demand. To me, these prices at $80 – 85 are very much in line with the global growth picture.
Here is another argument that has to be taken into account: all of these commodities are valued in U.S. dollars. The supply of dollars is increasing with the next round of quantitative easing. In that respect, the price increase of commodities priced in U.S. dollars is also a function of the liquidity provided by the Federal Reserve System. Thus the debasement of the U.S. dollar also plays out in the commodities markets. So I strongly oppose the point of view of Mr. Mike Norman.
And you know that members of OPEC are already calling for an oil price of 100 U.S. dollars just to balance out the loss of value in the US dollar.
Indeed. And this is very much in line with our call for next year. We are forecasting that the bottom of the range next year will be somewhere around 80 U.S. dollars and that the upside potential for the next 12 to 14 months stands at roughly 110 U.S. dollars.
Are we heading towards a new oil price spike like the one of 2007/08?
I’m not seeing this really. This oil price spike was very much related to the lack of a free market approach. We have two mayor players, in particular JPM. What applies to the precious metal markets partly applies to the energy markets. JPM plays a very important role. If many get surprised by an upswing in the global economy in 2010, it would be quite remarkable if the oil price remains comparatively stable. My gut feeling is, that energy markets have a kind of a political taste to them. In this respect, I am not expecting a repeat of 2008.
What will be the outcome of a rising oil price for a) the economy, b) precious metals, c) commodities in general, and d) food prices?
Let me put it this way: when you look at what’s happening in China over the last few years, it is obvious that we do have a "war" in the world of commodities. It is essential for the future development of countries that they find enough resources to feed their economies. In that respect, all these topics – oil, precious metals, food, and commodities in general – basically mirror the same topic. The oil price will have a price impact, for example, on food production. It will have a impact on commodities in general – and this is creates upward price momentum. With this upward price momentum, as I said early on, precious metal prices will also move up.
For the next decade, I see a clear case for a further bull market in all commodities. If you look at the food markets, we can state that 5 billion people have higher living standards and thus require more. That gives a very solid foundation to the agricultural markets. Commodities in general, whether we talk about rare earths or whatever, are in demand. Also here, we have upward price momentum. And energy is basically the means by which to transport all these things in a mobile world. So these prices will also surge up. We will have inflation on an exogenous commodity-related basis.
With regard to food prices: do you foresee dramatic developments for ordinary people?
No, not really. We have to bear in mind that only 50 years ago people were earning their money in order to pay the rent and buy food. What we have seen over the last 30, probably 40, years is a situation where this cluster changed. We will have to adjust to a new paradigm whereby people must pay more for food and agricultural products.
Do you think the peak oil scenario is something we all should pay more attention to?
Well, I think there is peak oil in a way, but not in the way it is being described. There is enough oil on the earth in my eyes, but the reserves we can get hold of are limited currently, due to the price scenario. In that respect, yes, peak oil plays a role in pushing prices higher for the foreseeable future. Eventually, we will exploit new resources and use these new resources. There are plentiful resources over a longer time frame, but at higher prices.
What’s your overall outlook for 2011?
There are two sides to it. If we look at the crisis, in the summer of 2011, the fifth year of the crisis will begin. And the United States will again be at the center of this crisis. The fact is that the United States and Japan are the only countries that are still focused on cosmetics in managing their economies. There have been no structural reforms so far. They represent 23 percent of world GDP. That is a risk factor. But this risk factor looks manageable if 70 percent of the world economy is performing strongly.
50 percent of the world economy are the emerging market countries. They are not encumbered by any major dependence on Western finance. Rather, they are the countries which provide stability to the system. They have growth of 6 to 8 percent and their indebtedness, whether it’s governmental or private, is very low. Take China, for example – a 22 percent debt-to-GDP ratio and with hardly any consumption-related indebtedness in the private sector. So growth within the emerging market countries is stable in my eyes. Next year the growth pattern will come off from roughly 7.3 percent this year towards 6.5 percent, but it will still be strong.
20 percent of world GDP is defined by strong industrialized nations like Australia, Canada, Germany, Scandinavia and the Northern European hemisphere. They are doing well with growth patterns in between 1.5 and 3.5 percent.
This 70 percent represent the two main catalysts for a very positive outcome next year. I expect world growth to be 4 percent at a minimum and I don’t rule out 5 percent; so expect a very high level of growth in 2011. In that respect I see stronger equity markets.
Also I want to put a focus on the cyclical approach. On the one hand, we have the inventory cycle. The inventory cycle is far from over. Normally it is a short cycle. This time it is prolonged because many participants in the real economy have been frightened by the sheer size of the global crisis. The inventory cycle will last at least until the summer of 2011 and will have a positive impact on global growth in 80 percent of the world economy.
The capital investment cycle just started in the first quarter of 2010, after having halted for 18 months within industrialized nations – which is a total anomaly of historic proportions. In that respect, I expect the capital investment cycle to last for another two to three years for 80 percent of the world economy. And basically this capital investment cycle will also have an effect on the inventory cycle because, as I’ve said, inventories have not been built up.
As a result of these two impacts, the consumption cycle will start to pick up in 70 percent of the world economy due to higher employment. And this setup – of 80 percent inventory cycle and capital investment cycle plus 70 percent consumption cycle – is something that we have not seen in the world economy since the early 1950’s. That will have a more pronounced effect on the global growth picture than most of my colleagues anticipate.
We correctly called the turnaround in the global economy in 2009 and I have been an optimist during 2010. We said that this will be a very strong upswing. We stick to this view. In particular, the analysis of these cycles – inventory, capital investment and consumption cycle – gives us very good arguments to expect a growth pattern that is higher than the mainstream expects in 2011, and probably into 2012. That leads us to the conclusion that commodities, in particular precious metals, will gain throughout this upswing in the global economy.
One final question: if we assumed a worst case scenario – what can and what should the average person do in order to survive?
Well, as I’ve said, the biggest risk related to my positive outlook is that the U. S. fails. I can’t see this happening in 2011 or 2012, but it is a risk. Given the fact, that the global financial system is not in equilibrium, but distorted, in particular by the policies of the United States, I strongly recommend investment in real assets – and real assets are commodities, precious metals, land, real estate at reasonable prices equities, and shares.
As I’ve said to you, we have 70 percent of the world economy that is doing nicely. And if you look at the current earnings season, companies are doing extremely well and are surprising to the upside by a 4:1 ratio. That is something to bear in mind. And given the valuation of equity markets – if you look at the price-earning ratios of the DAX for example, you’re below 11 on expected 2011 profits, you are at 140 percent of book value, which is historically cheap, and the dividend yield is 3.2 percent, outperforming outstanding 10 year bonds, which stand at 2.3 percent. So if you look at equity markets, these markets are very, very attractive given the pricing.
Thank you very much for taking your time, Mr. Hellmeyer!