I dont think that US will default on Aug 2, 2011 as there are too many stakes involved with the biggest economy of the world. If the US default, it would have a ripple effect on the global financial markets and real catastrophe. I don't think the U.S. will default in terms of not paying the interest on its debt. They will though default via a falling dollar as Bernanke begins printing more money i.e. Quantitative Easing 3. With such uncertainty gripping the markets, investors should run for Gold/Silver. The risk is not to hold gold. Whilst there is the potential for 10 percent downside in the short term over the next five to ten years the gains will be big. Or put another way, the purchasing power of paper money will fall. Cash is very risky asset except in times of major market corrections. Talk of fresh monetary stimulus has sent stocks soaring and bonds falling. The market wasn't thinking there would be any mention of QE3 whatsoever and here we're finding out QE3 is not being ruled out. It's a tantalizing headlines. QE3 would be a disaster for the US dollar, making it weak for several years till 2014.
So, what should be done?
A new era of an austerity is the only way to put things in order. The US government borrows $4.5 billion a day just to keep going, that the national debt is now an existential threat to its economy. No wonder this is being called the most predictable crisis in U.S. history. Austerity is always contractionary leading to recession. So, the big question is the US economy heading for Japanese style of lost decade. I dont rule out the possibility.
Knowledgeable people in finance are aware that the U.S. Federal Reserve has been buying 70 percent of all new Treasury paper, making the government by far the largest client of its own debt. This is possible only by increasing the money supply and the balance sheet of the Fed itself, a practice that sooner or later must blow up. Increasing the monetary base adds to inflation and loss of purchasing power of consumers who are already under debt. Price inflation can be reduced through monetary deflation.
Most american consumers are deleveraging themselves. The household debt to GDP ratio is 122%. It requires $5/6 trillion to deleverage to bring it back to 100% of GDP. Thus , it would lead to sub-par growth and stagnation in the economy with high unemployment.
Economists Carmen Reinhart and Kenneth Rogoff from Harvard Business School have shown that economic growth deteriorates as total government debt exceeds 90 percent of gross domestic product. America is already in that range. The real facts are even worse and people in Capitol Hill are aware of this precarious situation. It is already at $1,645 billion for the next fiscal year. The Congressional Budget Office concludes that President Obama’s most recent budget underestimates spending while also overestimates revenues.
According to the Wall Street Journal reports that Standard & Poor’s has taken the unprecedented step of putting U.S. short- and long-term debt on CreditWatch negative and saying there’s now a one-in-two chance they will downgrade the U.S.’s debt within three months. US requires $2 trillion for the next month. Will it survive the turmoil remains an arduous question?
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
Friday, July 15, 2011
Thursday, July 14, 2011
Italian can teach US about Fiscal Stability---by Shan Saeed
Italy can inculcate the message to USA about fiscal management. What I find funny listening to the media is how they like to paint the European debt crisis as some sort of foreign thing, like it is their problem. The media depicts the United States as a statue of stability.
However, as the saying goes, those who live in glass houses shouldn’t throw stones.
To act like these so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), or Club-Med European, countries are socialist basket cases and that the U.S. is some sort of capitalist haven is, in one word, a joke. The numbers don’t lie and here are the numbers.
DEBT TO GDP RATIOS OF PIIGS++
PORTUGAL 93%
IRELAND 96%
ITALTY 120%
GREECE 140%
SPAIN 60%
++ Sources
Deutsche Bank
Credit Suisse
UBS
HSBC
Citibank
JP Morgan
BNP Paribas
SG
Nomura
Economist Magazine
International Herald Tribune
Financial Times
Wall Street Journal
Bloomberg
Italy’s debt-to-GDP ratio is 120 percent*. According to U.S. government spending.com, by 2012 total government debt at the state, local and federal government level will be 120 percent! Italy’s current year’s fiscal deficit is 3.9 percent of GDP and its economy will grow about 1.4 percent in 2011.
* Sources: International Herald Tribune 13th July 2011
The United States’ fiscal deficit is near 9.3 percent of GDP for 2011 and the economy will grow at around 2.5 percent.
Italy has always been able to handle a larger debt load because nearly all of its debt is domestically owned. The United States, on the other hand, is dependent on foreign buyers, who own nearly 40 percent of its debt, and money-printing by the Federal Reserve, which has now surpassed China as the largest owner of the government’s debt due to its quantitative easing measures.
In Washington, Congress and republicans have juvenile bickering over the debt ceiling. Where despite all of his current political problems, Italian Premier Silvio Berlusconi quickly pushed through an austerity package to cut government spending.
The only difference is — and it is a big difference — the United States has the ability to print money to buy its own debt (and its dollar is the world’s reserve currency).
However, when you look at the facts, my question is simple: Who is really the fiscal and political basket case? You have to think and decide....
Disclaimer: This is just a research piece and not an investment advisory. All financial transactions carry a RISK.
However, as the saying goes, those who live in glass houses shouldn’t throw stones.
To act like these so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), or Club-Med European, countries are socialist basket cases and that the U.S. is some sort of capitalist haven is, in one word, a joke. The numbers don’t lie and here are the numbers.
DEBT TO GDP RATIOS OF PIIGS++
PORTUGAL 93%
IRELAND 96%
ITALTY 120%
GREECE 140%
SPAIN 60%
++ Sources
Deutsche Bank
Credit Suisse
UBS
HSBC
Citibank
JP Morgan
BNP Paribas
SG
Nomura
Economist Magazine
International Herald Tribune
Financial Times
Wall Street Journal
Bloomberg
Italy’s debt-to-GDP ratio is 120 percent*. According to U.S. government spending.com, by 2012 total government debt at the state, local and federal government level will be 120 percent! Italy’s current year’s fiscal deficit is 3.9 percent of GDP and its economy will grow about 1.4 percent in 2011.
* Sources: International Herald Tribune 13th July 2011
The United States’ fiscal deficit is near 9.3 percent of GDP for 2011 and the economy will grow at around 2.5 percent.
Italy has always been able to handle a larger debt load because nearly all of its debt is domestically owned. The United States, on the other hand, is dependent on foreign buyers, who own nearly 40 percent of its debt, and money-printing by the Federal Reserve, which has now surpassed China as the largest owner of the government’s debt due to its quantitative easing measures.
In Washington, Congress and republicans have juvenile bickering over the debt ceiling. Where despite all of his current political problems, Italian Premier Silvio Berlusconi quickly pushed through an austerity package to cut government spending.
The only difference is — and it is a big difference — the United States has the ability to print money to buy its own debt (and its dollar is the world’s reserve currency).
However, when you look at the facts, my question is simple: Who is really the fiscal and political basket case? You have to think and decide....
Disclaimer: This is just a research piece and not an investment advisory. All financial transactions carry a RISK.
Sunday, July 10, 2011
Big banks are stashing commodities---By Shan Saeed
Commodities prices are driving the banks to stockpile in order to benefit in the long run...Big Wall Street banks have long been involved in commodities, mainly through trading them. Now they are storing them, metals especially.
Within the last two years, Wall Street financial institutions such as Goldman Sachs and JPMorgan Chase have found they can make money through buying warehouses and storing metals such as aluminum, iron ore, copper and zinc.
Companies that own the warehouses are raking in about $1 billion in rental revenue each year, according to data compiled by the London Metals Exchange.
For Wall Street, warehouses are a way to earn extra income, especially as core businesses like trading are suffering. The facilities represent a relatively small but profitable way to bet on commodities markets without actually trading.
Some end users of commodities, such as can maker Novelis, worry that banks can cut supply in order to tweak prices, which is bad for their business. This is inappropriate.
Banks need to make as much money as they can these days now that equity and bond trading appears to be slowing. Bank of America has slashed about 60 positions in its equity-sales and trading division, while Goldman Sachs plans to eliminate 230 jobs.
The new banking regulations like in part for the firings, including new capital requirements, overdraft-fee limits and proprietary-trading bans could be threatening for the banks.
The banks are reacting to these new constraints on their activities by shrinking, sending jobs and business functions overseas, and beginning to cut employment in this country.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
Within the last two years, Wall Street financial institutions such as Goldman Sachs and JPMorgan Chase have found they can make money through buying warehouses and storing metals such as aluminum, iron ore, copper and zinc.
Companies that own the warehouses are raking in about $1 billion in rental revenue each year, according to data compiled by the London Metals Exchange.
For Wall Street, warehouses are a way to earn extra income, especially as core businesses like trading are suffering. The facilities represent a relatively small but profitable way to bet on commodities markets without actually trading.
Some end users of commodities, such as can maker Novelis, worry that banks can cut supply in order to tweak prices, which is bad for their business. This is inappropriate.
Banks need to make as much money as they can these days now that equity and bond trading appears to be slowing. Bank of America has slashed about 60 positions in its equity-sales and trading division, while Goldman Sachs plans to eliminate 230 jobs.
The new banking regulations like in part for the firings, including new capital requirements, overdraft-fee limits and proprietary-trading bans could be threatening for the banks.
The banks are reacting to these new constraints on their activities by shrinking, sending jobs and business functions overseas, and beginning to cut employment in this country.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
Saturday, July 9, 2011
I am bullish on South Korea-----by Shan Saeed
South Korea economy size might touch US $1 trillion in 2011. When one talks about Asia, there is passing reference to South Korea but never some in-depth analysis has been done. And I believe we are coming upon a period of high growth in South Korea during the rest of this year and year after.
As I have always maintained, this decade belongs to Asia. And Asia is full of heavyweights such as China, Indonesia, Japan, Singapore, Malaysia, Thailand and then down the chain. But one country almost always floats under the investment radar based on the difficulty to trade the market.
South Korea is a bustling and booming country. It is annoyed from time to time by its pesky and wanting to be flamboyant neighbor, North Korea. Once you get past the distractions, you will see a vast landscape of rapidly growing industrial complexes. Being surrounded by ocean, its shipping might and prowess is well known, but did you know they own some seriously large shipbuilding industries in Europe? They have spread their wings well past their borders and are an international force to reckon with.
Their auto, chemicals, heavy equipment and tech industries are making rapid strides across the globe. And nothing drives the point home more than the recently released industrial production (IP) data. The IP rose by 8.3 percent year over year, well above the market expectations of 6.9 percent year over year.
For all of you out there wondering about the effects of the Japanese earthquake and tsunami, it seems like the slowdown lasted for a couple of months only. The IP moved up 1.7 percent month over month, which is a sharp reversal from the 1.7 percent decline in April. So the effects of Japan don’t seem to last too long. I m bullish on Japan as well.
Not only was the IP strong, but it was good in all the right areas. Manufacturing production was up, as was equipment and auto. The weak spot was tech. I am confident that it will be on the rise in the next month or two.
While it is fair to focus on auto and manufacturing in South Korea, it isn’t fair to neglect the booming internal economy. As one can imagine, the service sector within South Korea didn’t tumble due to Japan and continues to show even growth. But the wholesale sector has jumped by nearly 2 percent year over year. The financial sector also is beginning to stir and show life. And the fascinating story is that the financial sector didn’t take a hit at all. So it is pure gain there.
Moving to the macro-economic story in South Korea – inflation is beginning to get high and sticky. Despite the raising of the interest rates this year, inflation hovers around the 4.4 percent mark, well above the central bank’s tolerable rates of around 4 percent.
I am now beginning to get concerned about the secondary effects of inflation there. The inflation has been high for a period of time and will now start to percolate to different sectors within the economy.
And this will mean that the central bank will have to raise rates at least twice, if not three times, this year. And we all know, higher interest rates equals a stronger currency. And I expect that the currency will overshoot before it regulates next year. I expect a 4 percent to 5 percent appreciation in the currency for the rest of this year against US dollar.
Add that to the handsome appreciation you can garner through carefully selected stocks, and you can expect a very good double-digit return from Korea over the remainder of the year. South Korea is the 4th largest derivative market right now.
The trick is how do you invest? Most U.S. stock brokers don’t offer you the ability to buy South Korean stocks. But the wise international investor knows a trick or two about finding a legal and valid way around that.
Using legitimate stock brokers in Hong Kong and Singapore, you can easily invest in South Korea. Yes, it takes a couple of weeks to set up an account, but once you are past that, Asia truly opens up for you and you can become a truly global investor without leaving your easy chair in the house.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
As I have always maintained, this decade belongs to Asia. And Asia is full of heavyweights such as China, Indonesia, Japan, Singapore, Malaysia, Thailand and then down the chain. But one country almost always floats under the investment radar based on the difficulty to trade the market.
South Korea is a bustling and booming country. It is annoyed from time to time by its pesky and wanting to be flamboyant neighbor, North Korea. Once you get past the distractions, you will see a vast landscape of rapidly growing industrial complexes. Being surrounded by ocean, its shipping might and prowess is well known, but did you know they own some seriously large shipbuilding industries in Europe? They have spread their wings well past their borders and are an international force to reckon with.
Their auto, chemicals, heavy equipment and tech industries are making rapid strides across the globe. And nothing drives the point home more than the recently released industrial production (IP) data. The IP rose by 8.3 percent year over year, well above the market expectations of 6.9 percent year over year.
For all of you out there wondering about the effects of the Japanese earthquake and tsunami, it seems like the slowdown lasted for a couple of months only. The IP moved up 1.7 percent month over month, which is a sharp reversal from the 1.7 percent decline in April. So the effects of Japan don’t seem to last too long. I m bullish on Japan as well.
Not only was the IP strong, but it was good in all the right areas. Manufacturing production was up, as was equipment and auto. The weak spot was tech. I am confident that it will be on the rise in the next month or two.
While it is fair to focus on auto and manufacturing in South Korea, it isn’t fair to neglect the booming internal economy. As one can imagine, the service sector within South Korea didn’t tumble due to Japan and continues to show even growth. But the wholesale sector has jumped by nearly 2 percent year over year. The financial sector also is beginning to stir and show life. And the fascinating story is that the financial sector didn’t take a hit at all. So it is pure gain there.
Moving to the macro-economic story in South Korea – inflation is beginning to get high and sticky. Despite the raising of the interest rates this year, inflation hovers around the 4.4 percent mark, well above the central bank’s tolerable rates of around 4 percent.
I am now beginning to get concerned about the secondary effects of inflation there. The inflation has been high for a period of time and will now start to percolate to different sectors within the economy.
And this will mean that the central bank will have to raise rates at least twice, if not three times, this year. And we all know, higher interest rates equals a stronger currency. And I expect that the currency will overshoot before it regulates next year. I expect a 4 percent to 5 percent appreciation in the currency for the rest of this year against US dollar.
Add that to the handsome appreciation you can garner through carefully selected stocks, and you can expect a very good double-digit return from Korea over the remainder of the year. South Korea is the 4th largest derivative market right now.
The trick is how do you invest? Most U.S. stock brokers don’t offer you the ability to buy South Korean stocks. But the wise international investor knows a trick or two about finding a legal and valid way around that.
Using legitimate stock brokers in Hong Kong and Singapore, you can easily invest in South Korea. Yes, it takes a couple of weeks to set up an account, but once you are past that, Asia truly opens up for you and you can become a truly global investor without leaving your easy chair in the house.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
Tuesday, July 5, 2011
Can gold standard fix the debt woes of US? by Shan Saeed
Is it possible to return to the gold standards? That's huge question. The policy maker and decision makers are questioning whether America needs a debit card, not a credit card, and no debit card would better serve the U.S. economy more than a return to the gold standard. The gold standard would force the government to live within its means and get the economy back on its feet again. It would make them financially and economically prudent going forward. No other reform would accomplish so much to hasten the return both of growth and fiscal balance.
The reserve currency franchise, which the USA uniquely possesses, is a kind of global credit card on which the outstanding balance never seems to come due and payable. This country needs a debit card--and the gold standard is that debit card.
A gold standard pegs the amount of currency in circulation to a fixed amount of gold, and supporters advocates that it would prevent the government's ability to print money and spend excessively. Lets share an important insight. QE3 would be a disaster for the US dollar going forward.
Congress might begin by brushing up on the Constitution and recalling its duty to 'coin money and regulate the value thereof.' Specifically, it should take steps to restore a dollar convertible into gold. Calls for a return to the gold standard — scrapped in the U.S. in the 20th Century — are growing, with Republican presidential hopeful Ron Paul arguing for such a policy shift. Why does paper make sense as money? They literally just put numbers on paper and that represents wealth. But there are many signs on the horizon it will not last, it’s going to change soon. I will leave the readers to decide whats the best option for the US economy to turn around and fix its economic and financial woes.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.
The reserve currency franchise, which the USA uniquely possesses, is a kind of global credit card on which the outstanding balance never seems to come due and payable. This country needs a debit card--and the gold standard is that debit card.
A gold standard pegs the amount of currency in circulation to a fixed amount of gold, and supporters advocates that it would prevent the government's ability to print money and spend excessively. Lets share an important insight. QE3 would be a disaster for the US dollar going forward.
Congress might begin by brushing up on the Constitution and recalling its duty to 'coin money and regulate the value thereof.' Specifically, it should take steps to restore a dollar convertible into gold. Calls for a return to the gold standard — scrapped in the U.S. in the 20th Century — are growing, with Republican presidential hopeful Ron Paul arguing for such a policy shift. Why does paper make sense as money? They literally just put numbers on paper and that represents wealth. But there are many signs on the horizon it will not last, it’s going to change soon. I will leave the readers to decide whats the best option for the US economy to turn around and fix its economic and financial woes.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.
Saturday, July 2, 2011
QE-3 would be a disaster for US Dollar----by Shan Saeed
The Federal Reserve's recent quantitative easing program, a $600 billion bond buyback program designed to stimulate the economy and the latest in a series of similar assets purchases, really didn't help the economy that much. Easing did weaken the dollar somewhat, which was good for U.S. exports. There is no empirical evidence that huge inflow of money into the system basically worked. It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion." Aside from that, I am ill-aware of anything that really worked. Not only QE2 but also QE1.
QE2 is the popular abbreviation for the $600 billion bond buyback program, while QE1, the first round easing, involved the Fed's purchase of mortgage-backed securities and other assets, both of which ended up swelling the Federal Reserve's balance sheet by trillions of dollars. The programs were designed to pump banks full of money so they would facilitate stock-market gains, lending and ultimately job creation.
I would be surprised that if QE-3 gets into the financial system as QE3 would continue the erosion of dollar.
Some current Federal Reserve officials have expressed concern with the size of such asset purchases especially at a time of near-zero interest rates.
Bubbles can form.
An extended zero-interest rate policy is producing new sources of fragility that we need to be aware of. Monetary policy is not a tool that can solve every problem.
In fact, interest rates need to eventually climb. The longer US leaves interest rates at zero, the more asset values will be defined by these low rates and the greater the negative impact will be once the inevitable move up in rates begins.
Some say quantitative easing was a mistake. Buying back assets involves printing money, which weakens the dollar and pumps up inflation rates.
Furthermore, a lot of that fresh money shooting off the Fed's printing presses has gone abroad and disrupted exchange rates, pumped up food and other commodity prices while doing nothing to create jobs back home in the U.S. If we analyze from the point of view that it made recovery stronger and more durable, we would have a lingering bad taste in your mouth.
QE2 was a terrible mistake, and I think it has been counterproductive for economic growth. It has gotten inflation up, and that has squeezed the people most in need of paying off their debts. Living standards has gone down by 50% in the last 25 years of an average american.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
QE2 is the popular abbreviation for the $600 billion bond buyback program, while QE1, the first round easing, involved the Fed's purchase of mortgage-backed securities and other assets, both of which ended up swelling the Federal Reserve's balance sheet by trillions of dollars. The programs were designed to pump banks full of money so they would facilitate stock-market gains, lending and ultimately job creation.
I would be surprised that if QE-3 gets into the financial system as QE3 would continue the erosion of dollar.
Some current Federal Reserve officials have expressed concern with the size of such asset purchases especially at a time of near-zero interest rates.
Bubbles can form.
An extended zero-interest rate policy is producing new sources of fragility that we need to be aware of. Monetary policy is not a tool that can solve every problem.
In fact, interest rates need to eventually climb. The longer US leaves interest rates at zero, the more asset values will be defined by these low rates and the greater the negative impact will be once the inevitable move up in rates begins.
Some say quantitative easing was a mistake. Buying back assets involves printing money, which weakens the dollar and pumps up inflation rates.
Furthermore, a lot of that fresh money shooting off the Fed's printing presses has gone abroad and disrupted exchange rates, pumped up food and other commodity prices while doing nothing to create jobs back home in the U.S. If we analyze from the point of view that it made recovery stronger and more durable, we would have a lingering bad taste in your mouth.
QE2 was a terrible mistake, and I think it has been counterproductive for economic growth. It has gotten inflation up, and that has squeezed the people most in need of paying off their debts. Living standards has gone down by 50% in the last 25 years of an average american.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
Bond Yields will rise higher--By Shan Saeed
Bond yields are rising again..Whats the reason?....Because of their historically low yields, most people haven’t made much out of the recent rise in interest rates.
This rise has come from a low level, but it is interesting to note that if you look at the yield of the 10-year bond, it has actually been in an uptrend since bottoming at near 2 percent in December 2008. After a rise to 4 percent in mid 2009, yields dropped to 2.3 percent by 2010. However, they didn’t go below their 2009 lows. In this most recent rally, bond yields fell to 2.80 percent but again didn’t take out the 2010 lows.
Slowly it looks like the bond is making a massive long-term top and interest rates are making a massive long-term bottom. It should be noted that these bond cycles are often long in duration. The 1981 to 2008 bull market in bonds was marked by a 3-year bottoming process from 1981 to 1984 before bonds really began to climb in price and fall in yield.
It looks like we are on the other end of the spectrum with the bond now in the midst of a long-term topping pattern. Due to the precarious nature of the U.S. fiscal situation, which features a deficit of nearly 10 percent of GDP and nearly $50 trillion in unfunded liabilities, I think that rates may start to rise faster than anyone thinks. We have seen this is in the PIIG nations that possess similar debt loads.
Whatever the case, it is clear that interest rates will be headed higher in the coming years starting from Q-4, 2012 OR Q-1 2013. Tough times ahead for the US economy...
This rise has come from a low level, but it is interesting to note that if you look at the yield of the 10-year bond, it has actually been in an uptrend since bottoming at near 2 percent in December 2008. After a rise to 4 percent in mid 2009, yields dropped to 2.3 percent by 2010. However, they didn’t go below their 2009 lows. In this most recent rally, bond yields fell to 2.80 percent but again didn’t take out the 2010 lows.
Slowly it looks like the bond is making a massive long-term top and interest rates are making a massive long-term bottom. It should be noted that these bond cycles are often long in duration. The 1981 to 2008 bull market in bonds was marked by a 3-year bottoming process from 1981 to 1984 before bonds really began to climb in price and fall in yield.
It looks like we are on the other end of the spectrum with the bond now in the midst of a long-term topping pattern. Due to the precarious nature of the U.S. fiscal situation, which features a deficit of nearly 10 percent of GDP and nearly $50 trillion in unfunded liabilities, I think that rates may start to rise faster than anyone thinks. We have seen this is in the PIIG nations that possess similar debt loads.
Whatever the case, it is clear that interest rates will be headed higher in the coming years starting from Q-4, 2012 OR Q-1 2013. Tough times ahead for the US economy...
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