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Bernard Tan: What Next For Gold
April 5, 2012
As can be observed from the chart of annual debt increases, this gorging on debt is not abating. Halfway through its fiscal 2012, the US government has already increased its debt by $792 billion. This half-way mark rate of increase is the 3rd highest in history (the other 2 being the half-way marks for fiscal 2009 and 2010) and is already equivalent to 5.2% of last year's nominal GDP!

In fact, the average increase in debt for the last 4 years was 10.3% of each year's nominal GDP!

If increase in debt is 10% of GDP and GDP only grows 4%, the difference of 6% is exactly the percentage point increase in the ratio of total outstanding debt to GDP. This simple arithmetic suggests that the US has now reached an inflexion point where its total outstanding debt to GDP ratio will accelerate because there is simply no way for its nominal GDP growth rate to catch up with the rate of growth in its debt.

At the current pace, within 8 years, the US debt to GDP ratio will reach 150%. These are the debt to GDP ratios that make Greece and Japan unsolvable basket cases.

In the US, it now takes about $3 of additional debt (by government, households and corporations) to generate $1 of additional nominal GDP. As it accounted for 78% of total additional debt in 2011, the US government cannot cut back because GDP growth would collapse. Households cannot borrow if house prices don't turn up and corporations are cash rich.

It's a death spiral.		 Read article
Bernard Tan: ECRI - ECRWWLI or ECRWGROW
March 19, 2012
For some time now, I have been a big fan of the Weekly Leading Index on the US economy published by the Economic Cycle Research Institute. There is so much economic data pouring out of the US that one can get easily confused about the overall state of the economy. I have found this index to be the one index that seems to encapsulate everything - "one index to rule them all", as it were.

The problem is the media and market watchers use two versions of this index - the actual index (ECRWWLI) and the YoY growth of the index (ECRWGROW), the latter being derived from the former. As to be expected, they use either one depending on which confirms the story they are trying to spin!

The purpose of this essay is to look back at US GDP growth since 1989 and see which indicator gives a more reliable and consistent account of the state of the US economy.		 Read article
Bernard Tan: Who In the Far East Is Positioned for the "New Normal"?
March 16, 2012
It has been almost 5 years since the Global Financial Crisis began to unfold in 2007. We are supposedly now living in the "New Normal", whatever that means. There remains much gnashing of teeth and wringing of hands about the stuck-in-the-mud Western economies compared to the the much celebrated recovery of the Asian economies post-crisis. However, on closer examination, I fear that the dynamism of the Asian economies may be over-generalised.

First, let's examine exports, which is what Asia is largely about. The attached chart shows monthly exports in US$, indexed to 100 in Jan 2007.		 Read article
Email of the day (1)
February 28, 2012
"I got this quote from our mutual friend, Bernard Tan. Wonder what you think?"

"There are two types of participants in the market. One watches prices all the time and imagine that they can discern real world dynamics from these price movements. The other thinks about real world dynamics all the time and imagine that they can discern price directions from these dynamics. Both are delusional."
Bernard Tan		 Read article
Bernard Tan: Is TECH back?
February 10, 2012
The Nasdaq peaked in Mar 2000, almost 12 years ago. For the longest time, observers have been fond of comparing the Nasdaq with the Nikkei, which peaked in Dec 1989. And for quite a while now, the Nasdaq index post-Mar 2000 has mirrored the movements of the Nikkei post-Dec 1989.

However, as can be seen from the attached chart, Nasdaq's mirroring of the Nikkei broke down in 3Q, 2010. Since then, a sharp divergence in behaviour can be seen. The white line is Nasdaq and green line is Nikkei, with the time axis adjusted so that the two peaks coincide.		 Read article
Bernard Tan: Who's a better cash machine
February 6, 2012
Firstly, it seems Apple is being financed by its suppliers. Their accounts receivable is only $8.9bn but accounts payable is a whopping $18.2bn. That's a nett accounts receivable of NEGATIVE $9.3bn. For the layman, this means that Apple owes its suppliers $9.3bn MORE than what its customers owes Apple.

Secondly, have you ever thought about the billions in $$$ in iTunes card sales that have not yet been utilised at the iTunes store? This is buried in deferred revenue item of current liabilities and amounts to $4.9bn. This is cash that Apple's customers have handed over but have not yet claimed the corresponding goods or services.

In other words, if Apple stops being a going concern, about half of the $30bn in cash, equivalents and marketable securities would disappear as Apple has to pay off its suppliers and refund the unutilised iTunes balances.		 Read article
Bernard Tan on China
January 13, 2012
Over the past 20 years, the PBOC (People's Bank of China) RRR has been in a downward phase only 3 times. And the circumstances were remarkably different.

During the Global Financial Crisis, China's faced a collapsing stock market bubble as well as a sudden evaporation of external demand. The policy response was not just rapid easing of monetary conditions but also one of massive fiscal intervention. This enabled the stock market to bottom very quickly.

The point I am trying to make is that if an economic crisis is purely the result of external shocks without any collapsing domestic bubbles or if there is massive fiscal stimulus measures, monetary easing would result in a bottoming of the stock market very rapidly after the first easing.

However, if there are large domestic bubbles bursting, absent any massive fiscal intervention, the cleansing process takes 12-24 months i.e. the stock market will only bottom after that process is completed.		 Read article
Email of the day (1 & 2)
August 24, 2011
"Thanks for the good work. Hope everything is just fine at your end!

"I am happy to comment on Bernard Tan's analysis, but I guess you may have linked the wrong paper. Please check.

"Again, I am happy to comment against the background of my "Beyond Repair" book that I published in April 2010, where I exactly outlined that Germany's fiscal policy is actually a big mess, given the numerous shadow budgets that are not accounted for in official figures.

"For example, unified Germany has not repaid one Euro cent of the "German inheritance fund", i.e. East Germany's debt accrued up until 1989. We simply pay the interest indefinitely. There are a least a dozen of these kind of funny budgets floating in the background.

"The EFSF [Ed: European Financial Stability Facility], to be ratified in Germany on Sep 23rd, is clearly the most recent highlight of government shadow banking... The EFSF is not accountable to anyone and has no obligation to publish any information... It is outside of the EU legal framework. It is supposed to do the "dirty work" that is now done by the ECB (accountable, with the obligation to publish data)... The Germans' life on an island of illusion and delusion...

"FYI: In July 2011 I published the Second Edition of my book ("Beyond Repair- Germany in Systemic Change" - only in German...), since my publisher claims, demand for the book in Germany is only outstripped by the demand for 1kg gold bars..."

And:

"Fully agree with Bernard. Most German economists (or economists covering Germany) seem to ignore these simple figures and trends.

"Many high profile economists are usually working at one of the well-known economic research institutes. These institutes are usually linked to a left-wing or right-wing political party (CDU, SPD). All these economists are public sector employees. It is obvious that many of these academics do not even grasp what's going on, since none of them has enjoyed an education on a trading floor.

"All are enrolled in the Keynesian beauty contest (I know everything better and therefore I will advise the ECB, government what to do) than rather analyze market trends. That is why none of them has seen gold to outperform in the last ten years. That is why all of them usually believe that Greece can manage a fiscal / economic turnaround...

"Apart from that no German government (present and past) had ever any interest to publish a consolidated "fiscal balance sheet" (federal budget, shadow budgets like the German inheritance fund, Länder and local budgets, health care, pension, etc...). Similar to the US...

"Also, if you work for Deutsche Bank or any other high profile bank you will not criticize the government (as an economist). That will damage the bank's reputation and/or put your career at risk. Also, no access to FinMin officials if you start to continuously criticize Berlin in public... And all of these banks had also been bailed out by Berlin in the past (except DB of course).

"So you better keep quiet."		 Read article
Bernard Tan: Germany Is Hardly A Paragon Of Fiscal Virtue
August 22, 2011
Germany is a country with a great industrial base. Unfortunately, it is also a country that has one of the most bloated and overpaid public sectors in the developed world. In addition, the massive pool of savings and surpluses generated by its industrial base has been very poorly deployed by its large and very incompetent banking sector.		 Read article
Bernard Tan: Sailing Through A Flock of Black Swans
April 28, 2011
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