All ETF Daily News Articles

ETF Securities Suggests A Sponsor Consordium

europeETF Securities is spearheading an idea to gather groups of financial institutions to sponsor ETF's collectively where as current ETFs are generally sponsored by one single institution. The danger of the current system is what may happen to the ETF should the financial institution fail. (That could never happen right?) See the below from reuters:
LONDON, April 6 (Reuters) - ETF Securities is launching a consortium of ETF issuers to boost liquidity and transparency in the market and help reduce risks, it said on Monday. ETF Securities said more than 15 global banks and financial institutions worldwide had shown "a strong desire" in joining the consortium. Previously all ETF issuers have been owned and run by single institutions.  "Under the current ETF issuance model, if the sponsoring/issuing financial institution fails, it is highly likely that their respective ETFs would be greatly disrupted and potentially liquidated," ETF Securities said in a press release.  "The current ETF issuance model by single financial institutions could be strengthened by diversifying index replication across a consortium of the strongest financial players and concentrating liquidity within a single platform." ETF Securities said members of the exchange would be able to participate in trading, market making, index replication, management fees and the equity value of the consortium and will be able to issue selected white label products. "From an investor's point of view we believe that there is a danger that every bank has an ETF Issuance business," said Hector McNeil, Managing Partner, at ETF Securities. "Currently there are over 10 different Eurostoxx50 ETFs. We don't need another 10. ETF Exchange will negate the need for banks to adopt this strategy." He said the consortium should be complete within the next few months. (Reporting by Rebekah Curtis; editing by James Jukwey)
ETF BASIC NEWS April 6, 2009 12:57pm

ETF Securities USA LLC Files For Platinum And Palladium-Backed ETFs

platinum2A unit of London's ETF Securities has filed with the Securities and Exchange Commission to register platinum and palladium trusts in the United States, according to a notice on the SEC's website. According to the website, ETF Securities USA LLC made an S-1 filing -- which companies use to register their securities with the SEC -- on behalf of the ETFS Platinum Trust and ETFS Palladium Trust on April 2. ETF Securities declined to comment. The company currently operates a range of exchange-traded commodities in Europe and Asia. If the filing results in a listing, the products will be the first platinum and palladium-backed ETFs in the United States. ETFs issue securities backed by physical stocks of commodities, and have formed a major component of demand for precious metals especially in recent months. Analysts say they fear strong ETF demand for platinum and palladium could cut supply for industrial users. "This is an audacious move by ETF Securities and one that could have a major impact on platinum and palladium prices, both in the near term (if investors anticipate approval of these products) and in the longer term if the ETFs squeeze physical metal availability," said UBS in a note on Monday. Source: reuters Click on the following link for the actual S-1 filing:
ETF BASIC NEWS April 6, 2009 11:31am

Vanguard VSS Small Cap ETF Begins Trading

vanguard3 VALLEY FORGE, Pa.--(BUSINESS WIRE)--Vanguard FTSE All-World ex-US Small-Cap ETF, which seeks to track the performance of the FTSE Global Small Cap ex US Index, has begun trading on the NYSE Arca exchange under the ticker symbol VSS. The launch brings the number of Vanguard’s ETFs to 39, with aggregate assets topping $44 billion. VSS holds approximately 2,100 securities and has an expense ratio of 0.38%, making it lower-cost and more broadly diversified than the other small-cap international-focused ETFs available today.* It is the only international small-cap ETF in the marketplace to cover both developed and emerging international markets (Source: Lipper Inc., February 27, 2009). “Many advisors are committed to providing international exposure within their clients’ portfolios, but until now a low-cost index option with developed and emerging market small-cap exposure was not available,” said Martha Papariello, principal, Vanguard Financial Advisor Services. “VSS serves as the ideal complement to Vanguard FTSE All-World ex-US ETF [VEU], which was introduced in March 2007 and holds mid- and large-cap securities.” With a historically low correlation to U.S. small-cap securities, international small-cap ETFs can further diversify a portfolio containing only domestic and international large- or mid-cap stocks. VSS provides advisors with a low-cost option for customizing and diversifying their clients’ international portfolios. Financial advisors seeking more information about Vanguard's ETFs and low-cost mutual funds can visit The site features analytic tools and practice-management programs to help advisors better meet the changing needs of their clients. About Vanguard Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages $1 trillion in U.S. mutual fund assets, including nearly $490 billion in retirement assets. Vanguard offers more than 150 funds to U.S. investors and more than 50 additional funds in non-U.S. markets. *Sources: Lipper Inc. and Vanguard, February 28, 2009. The expense ratio for Vanguard FTSE All-World ex-US Small-Cap ETF is estimated at 0.38%, far below the 0.64% average expense ratio for international small-cap ETFs. FTSE All-World ex-US Small-Cap ETF has approximately 70% more holdings than the nearest competitor ETF—2,100 holdings versus 647. All asset figures are as of March 31, 2009, unless otherwise noted.
ETF BASIC NEWS April 6, 2009 10:30am

Reasons not to invest in WisdomTree’s DHS ETF

dividend1Dividend-paying stocks are compelling to investors for many reasons. Not only do they tend to be less volatile as a group and provide a real cash return right away, but they can also reflect management's long-range visibility on profits and show its commitment to partnering with shareholders. Back in 2006, WisdomTree Investments presented its concept of weighting some of its equity ETFs not by each company's market value (as was the traditional indexing approach popularized by Vanguard), but rather by total dividends paid. WisdomTree's rationale made some sense -- at least in theory. Indeed, it supported this theory by back-testing the strategy from 1964 to 2005 and found that not only did the portfolios exhibit lower volatility, but that "four of the six WisdomTree Domestic Dividend Indexes generated greater price appreciation than the S&P 500 Index, even without the reinvestment of dividends." The problem was, this dividend-weighted theory rested on one enormous assumption: that the dividend-paying environment would continue to behave roughly the same way it had for that 41-year testing period. Oops As we're all now well aware, the dividend landscape has dramatically changed. The past 15 months have been the worst stretch for dividend investors in modern history. Sixty-two S&P 500 companies slashed their payouts some $40.6 billion in 2008 alone. Another $41.8 billion in dividend cuts -- a record -- already came in the first 90 days of 2009, including cuts from traditional stalwarts like Capital One Financial (NYSE: COF) and State Street (NYSE: STT). Standard and Poor's expects S&P 500 dividends to decline some 23% this year -- the worst decline since 1938. Needless to say, these massive dividend cuts have adversely affected WisdomTree's dividend-weighted strategy. As of Feb. 28, none of the six domestic dividend ETFs had outperformed the S&P 500 since their respective inception dates. In fact, the worst-performing WisdomTree domestic dividend ETF has been the High-Yielding Equity Index (DHS) -- or as it was recently and curiously renamed, the Equity Income Index. Whatever name it goes by, this dividend-weighted ETF is down 48% since inception in 2006, much worse than the 29% lost by the S&P over the same period. The wide underperformance of the ETF is largely a result of its dividend-weighted design, which is to "reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share." In other words, if company A is expected to pay $500 in cash dividends next year, it should have a larger weight in the index than company B, which is expected to pay $250. Handcuffed Under normal circumstances, that sounds like a nice way to generate extra dividend income and stack your bets behind strong companies. This year, though, has been anything but normal. It's been the higher-yielding stocks whose dividends have been under the most pressure. Adding insult to injury, the ETF only rebalances once annually, rendering it effectively helpless in a rapidly changing dividend environment. As dividend-dependent investors flocked out of stocks that dramatically cut their payouts, this ETF has had to sit and grin it out. All 10 of these stocks remain in the ETF's top 15 holdings to this day, despite the massive dividend cuts. A better way For investors seeking to benefit from the advantages of dividend-paying stocks, the WisdomTree Equity Income ETF is one investment to avoid. With dividends being slashed left and right in this market, selectivity is essential and mechanical strategies like this one are left at a major disadvantage. Among other things, savvy dividend investors will want to look for companies with solid balance sheets, a history of increasing dividend payouts, and plenty of free cash flow to cover the payments. Source: By Todd Wenning
ETF BASIC NEWS April 5, 2009 12:44pm

One World, One Currency?

currency Zhou Xiaochuan of the People’s Bank of China recently proposed the creation of a new international reserve currency. Xiaochuan argues:
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.
The bold letters were added by me. I find this statement profound. Zhou proposes a super-sovereign reserve currency managed by a global organization which could both create and control global liquidity. Zhou writes:
When a country’s currency is no longer used as the yardstick for global trade and as a benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
My interpretation is that Zhou (China) supports a global institution to manage the “one world currency”, and that international trade would be conducted in this currency. Commodities like oil and gold would be priced in the world currency. At the same time, each individual nation (or zone, as in Europe) would keep and maintain there existing currency and manage fiscal and monetary policy within their borders in order to keep their currency’s relationship with the one world currency at an optimal ratio reflecting existing economic conditions in that country. China is obviously concerned to find themselves the biggest holder of US Treasuries. China also holds the world’s biggest foreign exchange reserves. Watching the US Federal Reserve, the US banking system, and the near (actual?) fraudulent rating of sub-prime debt as “AAA” by the rating’s agencies Fitch, Moody’s, and S&P which is the root of the current crisis, who can blame China for trying to figure out a way to insure their US investments? As they watch Congress enact bailout packages for the ultra-rich who don’t need the bailouts, at the expense of the US middle-class tax-payers who DO need the bailouts, the Chinese must have lost all confidence in US policymakers’ ability to think logically and act in an economically prudent fashion. The Chinese know the result of continued massive US deficit spending will be a devaluation of the huge pile of US Treasuries they sit atop. They would probably begin a massive move out of US dollar denominated assets now if they thought they could do so without harming themselves. So, what better way to do so than to create a global currency, establish equilibrium, and then move out of the US dollar in a controlled and more leisurely pace? With the US dollar being the world’s reserve currency, such a move is not currently possible as the spotlight is too bright. However, with a global currency and separate exchange rates in Euros, Yen, Renminbi, and yes, US dollars, to the world currency, the Chinese investment in US dollars would be better insulated. They could also buy oil and gold in the world currency, whereas now these two commodities are traded (pegged) to the US dollar. Don’t expect the central bankers around the world to support such a world monetary authority in public. The timing is bad too - a world in financial crisis is probably not the time for such a fundamental change. Geithner and Bernanke have apparently flatly rejected the notion. Note that Geithner first appeared open to the idea, but when the US dollar weakened appreciably, he made a “clarification” of his position. Was such a slip intentional?
ETF BASIC NEWS April 5, 2009 6:28am

Estimated US Taxpayer Cost For Bailout Jumps

cashWASHINGTON, (Reuters) - U.S. congressional budget analysts have raised their estimate of the net cost to taxpayers for the government's financial rescue program to $356 billion, an increase of $167 billion from earlier estimates. The Congressional Budget Office had originally projected the $700 billion Troubled Asset Relief Program would cost taxpayers $189 billion.  The additional cost, which applies to TARP spending for fiscal years 2009 and 2010, was included in the CBO's March projection of a $1.8 trillion deficit for fiscal 2009, which ends Sept. 30.  The TARP cost projection was raised due to changes in financial market conditions, new transactions and a shift in expected timing of payments, the CBO said.  The Treasury Department announced plans to use some of the money to help avoid home foreclosures and made new deals with Bank of America (BAC.N) and American International Group (AIG.N). Those programs involved higher subsidy rates than previously estimated, the report said.  Congress passed the Wall Street bailout program in October with the goal of stabilizing banks and reassuring jittery markets.  Source: (Reporting by Lisa Richwine; Editing by Jackie Frank)
ETF BASIC NEWS April 5, 2009 4:40am

What Lies Ahead For ETFs In Asia

asia Over the past month, the U.S. stock market has held its ground and shot off a nice rally, but what lies ahead for exchange traded funds (ETFs) and the markets in Asia? Those who follow Asian markets know that Japan is the big dog when it comes to ETF products. In fact, some believe that there is too much overlap between products offered on the Tokyo Stock Exchange. For example, there are three ETFs that track that the Nikkei and three ETFs that track the Topix.  Japan is somewhat of a complex place.  It is very difficult to cross-list ETFs in Japan, states Paul Hoff, managing director of FTSE for the Asia-Pacific markets, in an interview with Rita Raagas De Ramos of Asian Investor.  For this reason, FTSE is introducing the first theme-based ETF in Japan. In regard to other regions of Asia, FTSE will be introducing a new thematic ETF in Malaysia on plantations.  This will be launched on FTSE’s custom index that it launched for Malaysia.  China will be an interesting market to keep an eye on as well.  The Shanghai Stock Exchange has a nice initiative to get foreign ETFs listed on the domestic market. Taiwan has recently opened up a whole new can of competition for ETFs opening to its doors to ETF providers, which was once exclusive to FTSE.  This enables many investors to have several ETF options and a diversified portfolio. One problem that is systemic in Asia is the regulations that stem across borders.  In some nations, the regulations make it lax for ETFs to launch, such as Singapore and Malaysia.  In others, there are a lot of challenges, such as in Taiwan and the Philippines. A second problem that arises in Asia is the difference in time zones in which the stock exchanges trade.  The Association of Southeast Asian Nations (ASEAN) is trying to alleviate this predicament by establishing an ASEAN board where investors from different countries can invest across each of the markets.  This will be tough to get running, though. One major problem that investors will have to overcome is the limitation of funds that can be invested outside of  his home country, which is a regulation imposed by the majority of Asian nations. Source: Tom Lydon  Kevin Grewal contributed to this article.
ETF BASIC NEWS April 4, 2009 4:43pm

Gold Remains Investors Top Asset Choice!


Gold’s Price Bolstered by Continued Volume

April 3, 2009 at 1:49 pm by
After consolidating to $893 per ounce, gold rallied to $906 on worries stemming from a poor employment report. Gold’s status as a safe-haven investment has kept its price high, especially as analysts ponder weak economic reports. Investors’ interest in gold has far from wavered, with Reuters reporting that the SPDR Gold Shares (GLD: Quote, Profile, Advanced Chart, News) rests with 1,127.44 tonnes in reserve, a level first reached on March 29 that has now extended into April 2. In looking to the future of the precious commodity, gold investors must consider upcoming IMF-related gold sales, as well as a rallying stock market, which are generally inversely related investments. Even as gold remains popular, investors withdrew the equivalent of 3.47 tonnes of silver from the iShares Silver Trust (SLV: Quote, Profile, Advanced Chart, News) after reports that India, the largest worldwide importer of metals, had reduced its imports.
ETF BASIC NEWS April 4, 2009 12:33pm





The first graph is from Doug Short of (financial planner): "Four Bad Bears".

The rally has taken the S&P up almost 25% from the low - but the market is still off 46% from the high.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Please note the major bear market rally in the 1930's before it came crashing down hard again.  The current market has so many similarities of the 1930's.

Stock Market Crashes Dow S&P500 NASDAQ Nikkei The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

The second graph is about a week old, but it still tells the tale.

These charts provide useful past history of market trends.

Source:  David Bettencourt


ETF BASIC NEWS April 3, 2009 5:00pm

Retail Bears Attract XRT ETF Investment

bearshopping By Doris Frankel  CHICAGO, April 3 (Reuters) - Some option traders appear to be pessimistic on the retail sector as the unemployment picture deteriorates, weakening the prospects of consumer spending.  In the SPDR S&P Retail Trust XRT.P, a bearish options combination trade called a "butterfly" was apparently enacted on Friday on expectations the exchange-traded fund might shed as much as 18.7 percent based on a share price of $24.60.  The XRT, which holds shares in more than 50 retailers, was up 24 cents to $24.63 in late trade.  The ETF has risen 33.5 percent since March 9 and has performed well over the past few weeks amid renewed hopes for the economy, consumer spending, and retail sales, said Frederic Ruffy, options strategist at  The ETF's gains come against a grim jobs report and a sharper contraction in the services sector as recession-weary consumers tightened their belts.  The U.S. unemployment rate soared to 8.5 percent last month, a 25-year high, as employers cut 663,000 jobs, the government said. Another report showed the U.S. services sector shrank for the sixth straight month in March.  "This spread could be a play on the continued unemployment picture with the jobless rate moving toward the 10 percent mark," said Victor Schiller, president of Investors Observer, a stock and options research firm in Charlottesville, Virginia.  "People just do not have the money to spend at the stores, and people who are working are retrenching and saving more."  In the options market, XRT May $20 puts, conveying the right to sell the fund's shares at $20 apiece, has been the busiest ETF contract of the day, Ruffy said.  The XRT was trading around $20 as recently as March 11.   Volume in the May $20 strike was nearly 75,000 contracts, nearly double the initial trade of 40,000 as players braced for a possible share price decline, Reuters data show.  Friday morning 40,000 contracts traded in the May $20 strike after a strategist apparently entered a substantial butterfly spread: selling the May $20 puts while buying 20,000 May $22 puts and 20,000 May $18 puts, Ruffy said.  The $20 strike creates the body of the fly and the $18 and $22 strikes make the surrounding wings.  Ruffy noted players sold the body for 40 cents per contract and bought the wings for 78 and 20 cents, thus paying a debit of 18 cents for the spread.  The potential pay-off is $1.82, if XRT settles for $20 per share at the May expiration, and the range of profitability is between $18.18 and $21.82. If the fund falls into that range by May options expiration, the spread makes money, excluding brokerage fees, he said.  "While the spread could possibly be a hedge, it is noteworthy due to its size. The initial 40,000 puts represents 4 million shares of the ETF, he said. (Editing by Leslie Adler)  Source:
NYSE:GLD April 3, 2009 3:33pm

NSX Releases March 2009 ETF/ETN Data Report

 JERSEY CITY, N.J., April 3 /PRNewswire/ -- National Stock Exchange, Inc. (NSX(R)) today announced that assets in U.S. listed Exchange-Traded Funds (ETF) and Exchange-Traded Notes (ETN) totaled approximately $489.2 billion at March 2009 month-end, a decrease of 16% from March 2008 when assets totaled approximately $583 billion. March 2009 net cash inflows from all ETFs/ETNs totaled $8.1 billion. 
ETF/ETN notional trading volume totaled approximately $2 trillion for March 2009, representing 38% of all U.S. equity trading volume. In addition, at the end of March 2009, the number of listed products totaled 839, compared to 699 listed products one year ago.  This data is included in the full NSX March 2009 Month-End ETF/ETN Data Report released by the Exchange, which has become a key industry source for ETF/ETN data. These Data Reports are published following the end of each calendar month.  The NSX monthly statistics include shares of open-end exchange-traded products, encompassing U.S. listed shares of investment companies, grantor trusts, ETNs and commodity pools.  NSX's full report provides ETF data on Assets Under Management, Net Cash Flow and Notional Volume, broken out by various categories. NSX also offers access to historical monthly reports. To view the full reports go to:  In addition, NSX publishes a product-by-product breakdown of the 839 products on which the data is based. The complete list can be accessed at:  NSX is the cost-effective provider of exchange services, committed to aligning its interests with those of its customers. Founded in 1885, NSX has been a driving force for change in the world of securities exchanges and continues to lead the way in exchange innovation. For more information on NSX, visit Source: prnewswire
ETF BASIC NEWS April 3, 2009 3:05pm



Markets rally for a month and everyone thinks the recession is over right?  Jim Cramer I think not.  Markets don't go straight up or down.  This country has several obstacles to overcome before a thought of a bull market exists!  Call me a perma bear but, we are no way clear of the events that will take place in this country for the next decade! 

Market Mood Brightens, But Is This Rally for Real?

Posted Apr 03, 2009 01:26pm EDT by Henry Blodget in Investing, Recession, Banking
Pundits changed their tune this week. We've gone from a 100% negative three weeks ago, to a few crackpot bulls two weeks ago, to a general consensus this week that the Depression is over and we're seeing the start of a brand new bull market. It's certainly possible. It's usually darkest before dawn, and, three weeks ago, when the Wall Street Journal plastered DOW 5000 on its cover and every business and economic measure seemed to be accelerating on the downside, it was pretty dark.  In the last week, moreover, data has actually been better than expected: The G20 wasn't a total flop, weekly unemployment gains haven't gotten much worse, mark-to-market accounting has been weakened, the Geithner plan promises to make banks look better at taxpayer expense.  Etc. But even if Q1 was the trough, as Nouriel Roubini predicted earlier this week on TechTicker, that doesn't mean we're going to get a quick rebound.  Roubini still thinks most economists are too optimistic, the economy won't be growing by the end of the year.  Merrill Lynch economist David Rosenberg, meanwhile, thinks that there's no way the economy and market can recover until the housing market stabilizes, and he thinks we're years away from that.  Rosenberg thinks the S&P could tumble to another new low and trade in a startlingly low 475-650 range for years. So as we head into the weekend, there's plenty to think about. Business Insidereditor Dan Colarusso and I discuss the state of affairs. Source: TECHTICKER
ETF BASIC NEWS April 3, 2009 1:41pm

THE GREAT INFLATION, Lessons from history

inflation This is an extremely long article, although it sheds light into how the market, and the world reacts to monitary decisions. Printing money creates a devalued dollar. A devalued dollar creates inflation. You will see inflation has been a consistent theme on ETF Daily News, (Hyper Inflation and the ETF UYM ; INFLATION WILL MAKE UYM A 10 BAGGER BY THE END OF 2009! ; How Does the Fed ‘Print Money’? ;) We are concentrating on this topic for one reason, it will affect everything we buy, everything we own, and our standard of living for decades to come. It is our focus to give you the tools to make the right decisions with your dollars now, to ride the inflationary curve up and make those dollars expand not contract. This is a worth read, albeit long:
Stable prices provide a sense of security. They help define a reliable social and political order. Like safe streets, clean drinking water, and dependable electricity, their importance is noticed only when they go missing. When they did just that in the 1970s, Americans were horrified. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste, and pizza. People couldn’t predict whether their wages would keep pace with prices. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans’ confidence in their future and their leaders. There were widespread consequences. Without double-digit inflation, Ronald Reagan almost certainly would not have been elected president in 1980; the conservative political movement that he inspired would have emerged later or, conceivably, not at all. High inflation incontestably destabilized the economy, leading to four recessions (those of 1969–70, 1973–75, 1980, and 1981–82) of growing severity. High inflation stunted the increase of living standards through lower productivity growth. High inflation caused the stock market to stagnate; the Dow Jones Industrial Average was no higher in 1982 than in 1965. And it led to a series of debt crises that afflicted American farmers, the U.S. savings and loan industry, and developing countries. Afterward, declining inflation—“disinflation”—led to lower interest rates, which led to higher stock prices and, much later, higher home prices. This disinflation promoted the last quarter century’s prosperity. In the two decades after 1982, the business cycle moderated so that the country suffered only two relatively mild recessions (those of 1990–91 and 2001), lasting a total of 16 months. Monthly unemployment peaked at 7.8 percent in June 1992. As stock and home values rose, Americans felt wealthier and borrowed more or spent more of their current incomes. A great shopping spree ensued, and the savings rate declined. Trade deficits—stimulated by Americans’ ravenous appetite for cars, computers, toys, and shoes—ballooned. At the same time, this prolonged prosperity helped spawn complacency and carelessness, which ultimately climaxed in a different sort of economic instability and the financial turmoil that assaulted the economy in 2007 and 2008. Who Was to Blame? Double-digit inflation was not an act of nature or a random accident. It was the federal government’s greatest domestic policy blunder since World War II, the perverse consequence of well-meaning economic policies, promoted by some of the nation’s most eminent academic economists. These policies promised to control the business cycle but ended up making it worse. The episode invites comparison with the war in Vietnam, the biggest foreign policy blunder in the post–World War II era. Both arose from good intentions: The one would preserve freedom; the other would expand prosperity. Both had intellectuals as advocates, whether economists or theorists of limited war. Both suffered from overreach and simplification; events on the ground constantly confounded expectations. But there is a big difference. One (Vietnam) occupies a huge space in historic memory. The other (inflation) does not. This inflation had no comparable precedent in American history. Sudden bursts of inflation had occurred before, almost always during wars when the government printed more money to pay for guns, soldiers, ships, and ammunition. What happened in the 1960s and ’70s was different. America’s most protracted peacetime inflation was the unintended side effect of policies designed to reduce unemployment and eliminate the business cycle. It was a product of the power of ideas. In the 1960s, academic economists argued—and political leaders accepted—that the economy could be kept permanently near “full employment” (initially defined as 4 percent unemployment). Booms and busts, recessions and depressions, had long been considered ugly and unavoidable aspects of industrial capitalism. But once people accepted the idea that the business cycle could be mastered, the self-restraint that had silently kept prices and wages in check gradually crumbled. New assumptions emerged. If government could prevent recessions, then companies could always count on strong demand for their products. All higher costs (including higher labor costs) could be recovered through higher prices. Similarly, if the economy was always near “full employment,” then workers could press for higher wages without facing job loss. If their current employers wouldn’t pay, someone else would. Government wouldn’t tolerate substantial unemployment; that was its promise. The result was a stubborn wage-price spiral. Wages chased prices, which chased wages. Inflation became self-fulfilling and entrenched. Everything rested on an illusion, the Phillips Curve: the notion that there was a fixed tradeoff between unemployment and inflation. If true, that meant a society could consciously decide how much of one or the other it wanted. If, say, 4 percent unemployment and 4 percent inflation seemed superior to 5 percent unemployment and 3 percent inflation, then we could choose the former. The trouble was that the tradeoff didn’t exist, except for brief periods. In an important 1968 paper, the economist Milton Friedman explained that, if government tried to hold unemployment below some “natural rate,” the result would simply be accelerating inflation. Another economist, Edmund Phelps of Columbia University, developed the concept almost simultaneously. By their logic, governmental efforts to push unemployment down to unrealistic levels were doomed to failure. What would actually happen in the 1970s—the constant acceleration of inflation—was foretold by Friedman and Phelps. But good ideas could not spontaneously displace the bad until actual experience demonstrated the differences, especially because the bad ideas were more politically attractive. For inflation to be reversed, the underlying politics and psychology had to change. Americans detested inflation. We seemed to have lost control, both as individuals and as a society, over our fate. Since 1935, the Gallup Poll has regularly asked respondents, “What do you think is the most important problem facing the country today?” In the nine years from 1973 to 1981, “the high cost of living” ranked No. 1 every year. In some surveys, an astounding 70 percent of the respondents cited it as the major problem. In 1971 it was second behind Vietnam; in 1972 it faded only because wage and price controls artificially and temporarily kept prices in check. In 1982 and 1983, it was second behind unemployment (and not coincidentally: the high joblessness stemmed from a savage recession caused by inflation). Among government officials, there was a widespread fatalism about continued inflation. President Carter often seemed forlorn at the prospect. Early in 1980, he was asked at a press conference what he planned to do about the problem. He replied, “It would be misleading for me to tell any of you that there is a solution to it.” His resignation was common. Inflation had so insinuated itself into the fabric of everyday life, the thinking went, that it could not be easily extracted. The standard remedy would be a horrific recession, or a depression, that would reduce wage and price increases. Inflation was rationalized as a reflection of the deeper ills of American society. It was not a cause of our problems; it was a consequence of our condition. Specifically, it was said to show that the nation was becoming ungovernable. Americans had more wants (for higher pay, more government programs, a cleaner environment) than could be met. When Ronald Reagan won in a near landslide—50.7 percent of the popular vote against Carter’s 41 percent—inflation was the dominating concern. Voters didn’t know that Reagan could control it; but they did know that Carter couldn’t. Later, Carter himself judged that inflation had been the decisive issue against him, more important than his mishandling of the Iranian hostage crisis. Exit polls showed that 47 percent of Reagan’s voters rated “controlling inflation” as the most important issue, followed closely by 45 percent who valued “strengthening America’s position in the world.” In the Gallup Poll in September, 58 percent rated inflation as the No. 1 problem. How Inflation Was Subdued The subjugation of inflation was principally the accomplishment of two men: Paul Volcker and Ronald Reagan. If either had been absent, the story would have unfolded differently and, from our present perspective, less favorably. Reagan, president from 1981 to 1989, and Volcker, chairman of the Federal Reserve Board from 1979 to 1987, forged an accidental alliance that was largely unspoken, impersonal, and misunderstood. There was no particular personal chemistry between the men. Nor was there any explicit bargain—you do this, and I’ll do that. Although Reagan supported Volcker, many officials in his administration openly criticized him. Even while the alliance flourished, it sometimes seemed a mirage. But the alliance was genuine, a compact of conviction. Both men believed that high inflation was shredding the fabric of the economy and of American society. The country could not thrive if it persisted. Buttressed by these beliefs, they broke with the past. Each had a role to play, and each played it somewhat independently of the other. Volcker took a sledgehammer to inflationary expectations. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s. In December 1980, banks’ “prime rate” (the loan rate for the worthiest business borrowers) hit a record 21.5 percent. Mortgage and bond rates rose in concert. By the summer of 1981, consumers had trouble borrowing for homes and cars. Many companies couldn’t borrow for new investment. Industrial production dropped 12 percent from mid-1981 until late 1982. In many industries, declines were steeper. In autos, it was 34 percent (from June 1981 to January 1982), and in steel it was 56 percent (from August 1981 to December 1982). By 1982 the number of business failures had tripled from 1979. Construction starts of new homes in 1982 were 40 percent below the 1979 level. Worse, unemployment exploded. By late 1982, it was 10.8 percent, which remains a post–World War II record. It is doubtful that, aside from Reagan, any other potential president would have let the Fed proceed unchallenged. Certainly Carter wouldn’t have, had he been re-elected, nor would his chief Democratic rival, Sen. Edward M. Kennedy (D-Mass.). Both would have faced intense pressures from the party’s faithful, led by unionized workers—especially auto- and steelworkers—who were big victims of Volcker’s austerity. Nor is it likely that any of the major Republican presidential contenders in 1980 would have acquiesced, including George H.W. Bush, Howard Baker, and John Connally. Reagan’s initial economic program promised to reduce the money supply to curb inflation. He was the first president to make that part of his agenda, and he never retreated from it. As the economy deteriorated, he kept quiet. He refused to criticize Volcker publicly, to urge a lowering of interest rates, or to work behind the scenes to bring that about. When the president did speak, he supported Volcker. At a press conference on February 18, 1982—with unemployment near 9 percent—Reagan called inflation “our No. 1 enemy” and referred to fears that “the Federal Reserve Board will revert to the inflationary monetary policies of the past.” The president pledged that this wouldn’t happen. “I have met with Chairman Volcker several times during the past year,” he said. “We met again earlier this week. I have confidence in the announced policies of the Federal Reserve.” Reagan’s patience enabled the Federal Reserve to maintain a punishing and increasingly unpopular policy long enough to alter inflationary psychology. There was an outpouring of bills and resolutions to impeach Volcker, roll back interest rates, or require the appointment of new Fed governors sympathetic to farmers, workers, consumers, and small businesses. Rep. Jack Kemp (D-N.Y.), a prominent Republican “supply-sider,” wanted Volcker to resign. In August 1982, Sen. Robert C. Byrd of West Virginia, the Democratic floor leader, introduced the Balanced Monetary Policy Act of 1982, which would have forced the Fed to reduce interest rates. Reagan’s popularity ratings collapsed. In May 1981, early in his presidency, Reagan’s approval had reached a high of 68 percent. By April 1982, it was 45 percent (46 percent disapproved); by January 1983, it was 35 percent, the low point (56 percent disapproved). As the economy sank, Reagan was advancing an economic program of across-the-board tax cuts, widely portrayed as favoring the rich, and spending cuts, widely portrayed as hurting the poor. He was portrayed as spearheading an economic assault against ordinary Americans. On inflation, Reagan was clear-eyed. “Unlike some of his predecessors, he had a strong visceral aversion to inflation,” Volcker later said. Reagan was “influenced by people like Milton Friedman and understood that inflation was always a monetary phenomenon,” that it was “too much money chasing too few goods,” said William Niskanen, a member of Reagan’s Council of Economic Advisers. “He was the first president who understood that.…He knew that controlling inflation by regulation [controls] was absurd.” Even now, the social costs of controlling inflation seem horrendous. Over a four-year period (1979–82), the U.S. economy’s output barely increased. It nudged ahead in the first two years and then fell back in the last two. Since 1950, there had been nothing like that. Unemployment peaked in 1982 near 11 percent—a figure that, a few years earlier, would have been widely judged inconceivable. Although lower inflation benefited most people, the casualties were numerous and broadly dispersed geographically and socially: small business owners, overextended farmers, industrial workers. The number of business failures in 1982 (24,908) was nearly 50 percent higher than in any other year since World War II, and it would double to 52,078 by 1984. From 1979 to 1983, farm income declined almost 50 percent. But against these heartbreaking costs, there were larger long-term gains. Once the recession lifted, the economy and productivity growth revived impressively. When Reagan left office, Americans still worried about inflation, but it no longer gripped them with fear. Inflation was one problem among many, not a scourge shredding the social fabric. The taming of inflation reinvigorated the economy as nothing else; the expansion lasted from early 1983 until the late summer of 1990. At the time, it was the second longest peacetime expansion in U.S. history. The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn’t control inflation was discredited. The notion that a little less unemployment could be exchanged for a little more inflation was discredited. In their place, a consensus slowly developed that “price stability”—a vague term that both Volcker and his successor, Alan Greenspan, defined as inflation so low that it barely affected people’s decisions—was desirable and would promote a more stable and productive economy. The Forgotten Crisis One of the dilemmas of a democratic society is how to take actions that, though immediately painful and unpopular, seem essential to the society’s long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims. This was so obvious that in the late 1970s a frontal assault on inflation seemed impossible. What Volcker and Reagan wrought now seems ancient history: an isolated episode with little relevance to our present condition. This is utterly wrong. For every nation, there are crucial demarcation points that fundamentally alter society. The greatest of these for the United States was the Civil War. The Great Depression and World War II created another massive chasm. In our era, the fall of double-digit inflation is one of those separation points, though on a smaller scale—a gorge, not a canyon. Something profound and pervasive occurred: what I call the restoration of capitalism. Much of what we now consider routine and normal originated in the tumultuous transition from high to low inflation. A majority of today’'Americans have never experienced double-digit inflation. In 2008 slightly more than 60 percent of today’s roughly 300 million Americans were born in 1962 or later, meaning that the oldest of them would have been only 17 or 18 when inflation peaked in 1979 and 1980. They were too young for it to have made much of an impression. Even for some of those who lived through it, the memory of inflation has faded. In a very superficial way, that provides a serviceable explanation for the way inflation’s memory has faded. But the same arithmetic applies to Vietnam—indeed more so, since it was an earlier event—and yet Vietnam retains a powerful grip on the national consciousness. Something else must be at work. Closer to the truth, I think, is a collective failure of communication and candor by the nation’s economists. At its base, double-digit inflation was their doing, a product of their bad ideas. There is now a widespread recognition of this, and although there are many technical studies of inflation and of the period of high inflation, there has not been much in the way of public apologies (from those who were complicit in the error) or reprimands (from those who were not, because they either dissented or were too young). There seems to be an unspoken pact of self-restraint to let bygones be bygones, perhaps out of collective embarrassment or a recognition that dwelling excessively on past failures might compromise economists’ prospects as government advisers and high-level appointees. Over the course of 2008, inflation has risen to the uncomfortable level of about 5 percent, driven largely by higher prices for oil and food emanating from international markets. Whether it will go higher or subside to the negligible range of zero to 2 percent (a level at which most economists believe prices changes are so slight that they barely affect most consumers or businesses) is impossible to say. What is less uncertain is the similarity between our present predicament and the situation that led to higher inflation in the 1960s and ’70s. Then, a little inflation seemed unthreatening; but a little led to a little more, and a little more led to a lot. Source:
ETF BASIC NEWS April 3, 2009 9:44am

Emerging Markets, The next bubble?


WHETHER THE GROUP OF 20 ESTABLISHED A "new world order," as British Prime Minister Gordon Brown asserted Thursday at the end of the London meeting of world leaders, it clearly gave a boost to the emerging markets of the world.

The G20 approved a $1.1 trillion package designed to pull the global economy out of recession, with a $750 billion expansion in funding for the International Monetary Fund, $100 billion for the World Bank and $250 billion in trade financing through multilateral financial institutions. Of the $750 billion for the IMF, $250 billion represents the creation of $250 billion of Special Drawing Rights, which is roughly the equivalent of printing money globally.

Stock markets around the globe soared following the G20 agreements, with the Dow Jones Industrial Average adding another 200 points to close just below 8,000 for the first time in nearly two months. Assets that have benefited from investors' aversion from risk, such as Treasury securities and the Japanese yen, fell sharply. Meanwhile crude oil rebounded.

Emerging market countries figure to be the biggest winners from the G20's package, according to Citigroup economists Don Hanna and Jurgen Michaels. Support for multilateral financial institutions is especially helpful for emerging markets, they write in a research note. So, too, is the increase in SDRs, which they note can be drawn down without conditions.

Emerging markets responded with sharp gains. The iShares MSCI Emerging Market Index exchange-traded fund (ticker: EEM), a useful proxy for the sector, surged 5.4% Thursday, about twice the gain in the Dow. Since its low of early March, the emerging markets ETF has surged 35%.

But even before the G20's largesse, emerging markets looked to be a big beneficiary of the Federal Reserve's monetary expansion, according to MacroMavens' Stephanie Pomboy. Just as the Fed's liquidity pumping after the dot-com bubble burst created the housing bubble, the U.S. central bank's exertions would serve to lift emerging markets, she writes in a note to clients.

The surplus liquidity isn't likely to ignite an inflationary boom in the U.S. economy if consumers refuse to borrow and spend. But that liquidity has to go somewhere, and emerging markets look like the most likely destination, she reckons.

Emerging markets and commodities took the first hits in the credit implosion because they were viewed as warrants (long-term call options) on global growth. Could it be emerging markets are moving from warrants on global growth to drivers of growth?

Meantime, Ms. Pomboy points out that while emerging economies account for 43.7% of global output, they represent only 10.9% of global stock market capitalization. China by itself makes up 15% of the global economy but less than 2% of market cap while the U.S. provides 21% of output but 43.4% of market cap.

"With so much room to grow…and so much money to flow..might the Emerging Markets become the next bubble?" she asks rhetorically. "All the ingredients are there, the persuasive story line (from their savings to their demographics), the dearth of compelling investment alternatives and, of course, the Fed's flowing font of cheap capital."

Now that's being augmented by the gusher being provided by the G20. And with a simple way to play it such as EEM, plus any number of single-country ETFs (notably the popular iShares/Xinhua 25 , better known by its ticker, FXI), it's easy to see traders' flocking to emerging markets.


ETF BASIC NEWS April 3, 2009 9:02am

The Ups And Downs With The Oil Market!

etf-newsWhy Oil ETFs Can Lose As Prices Increase

By Tom Lydon on April 2, 2009 | More Posts By Tom Lydon | Author's Website Understanding why the oil exchange traded fund (ETF) occasionally lags behind jumps in oil prices is a simple matter of knowing how it works. United States Oil (USO: 30.98 +2.40 +8.40%) is the largest ETF that tracks the commodity. It followed the 77% drop of crude prices between July and December. But Kevin Baker for TheStreet explains that although oil prices have risen 45% since the low in 2008, the ETF went down another 4.3%. What’s happening highlights the challenges that ETFs trading futures encounter. During bullish times, when the price of oil is expected to rise, funds can end up paying contract prices that are higher than spot prices, a situation called “contango.” Each time an oil ETF rolls contracts forward a month during periods of contango its return is eroded. USO holds long positions on oil futures, rolling them forward each month. Three factors impact the ETF:
  1. Changes in the spot price
  2. Interest income on uninvested cash
  3. The roll yield
USO’s prospectus warns of such a situation: a negative “roll yield” could cause the net asset value of USO to deviate significantly from crude’s spot price.
  • United States Oil (USO): down 12.4% year-to-date; up 7.8% for one month
NYSE:USO April 2, 2009 9:36pm

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