Thursday, December 23, 2010

US Treasury and Municipal Bonds are losing values. Dangers ahead...By Shan Saeed

Yield curves are the powerful indicator of the future. By Shan Saeed

This is the most important development since November-2010 in the US financial history. Long long-term U.S. Treasury bonds have fallen 7% in value. That's not supposed to happen. But it's happening. Municipal bond market has fallen 6%. That, too, isn't supposed to happen. But it's happening at a precarious time of the global financial turmoil.

For most of the last century, the whole world has believed the obligations of the U.S. government – and the obligations of thousands of states, cities, towns, and other municipalities in the U.S. – were the safest investments in the world. These "safe" investments aren't supposed to crash. The reason U.S. Treasurys and municipal bonds are crashing is by far the most important financial development of 2010. The crash has affected and will continue to affect the value of every stock, bond, exchange-traded fund... every type of investment there is.

If you've already looked for the reason bonds are crashing, it hasn't been hard to find. The reason bonds were crashing was on the front page of all the major financial websites. It's been there since November 3, when the Federal Reserve announced it would print $600 billion between now and June 2011 and buy Treasury bonds with it.

First week of November-2010, newspapers were hot. Headline from

1. Financial Times' website read, "Fed maintains asset purchase plan"
2. The Wall Street Journal's website read, "Fed Sticks To Bond-Buying Policy."
3. And Bloomberg's site read, "Fed Retains $600 Billion Bond Buying Plan to Boost Economy.

It all means the same thing: The Federal Reserve will keep printing money. QE2 will go global with countries getting enamored of BEN BENANKE latest escapade. ECB, BOE, BOJ will increase monetary base to buy bonds and long term assets to keep their economies moving. US dollar will continue to get weaker. The bond market will continue to fall. Interest rates will continue to rise. Yield would go up. Watch out for US dollar bubble and Government debt bubble. Make no mistake about it — the Obama administration is embracing massive inflationary deficit spending. Ben Bernanke has released unheard of measures of "quantitative easing" — intentionally devaluing the dollar as a risky gamble to restart the economy. In the meantime it has only eroded the value of your savings and decreased the returns you can get on safe investments like CDs, Money Market accounts, and bonds. President Obama has committed the government to at least $7 trillion in new spending and warned the American people to expect trillion-dollar deficits for the foreseeable future.

Decades ago, Famous Nobel laureate from Uni. of Chicago Milton Friedman answered these questions clearly and precisely in his insightful book, Money Mischief: Episodes in Monetary History. In Money Mischief, Friedman even warned that the coming inflation could "destroy" US economy. Furthermore, he wrote: "Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society." [Money Mischief, Page 191]

You see the end result of that process in countries like Zimbabwe today, where prices double every day, and it now takes a $10 billion Zimbabwe note to buy a single loaf of bread - assuming you can find one.

Could America suffer the same fate? Friedman wrote ominously, "The fate of a country is inseparable from the fate of its currency." He shared his strategy how the U.S. and the West could still avoid hyperinflation, even with unbacked paper currency.

Fortunately, the bond market remains more-or-less immune to swings in
policymakers need to justify their action in whatever language the
current times demand. The track record of the yield curve as a
predictor of future growth is more-or-less perfect, especially in the
United States.

Why is it that the yield curve is such a powerful predictor of the
future? Because the spread between short rates and long rates
basically dictates the profit margin of banks: the cost of funds is
basically the deposit rate paid to customers, while those deposits are
invested in longer-term loans and mortgages to the private sector, or
bonds purchased from the government. Simply put: the wider the gap
between short rates and long rates, the bigger the profitability of
the banks, and the bigger the profitability, the more eager they get
to lend, which in turn makes it easier for private entrepreneurs or
households to borrow. The rise in leverage creates growth as people
build new homes, companies invest in new factories and employ more

Conversely, when the curve flattens, the cycle goes into reverse:
banks’ profitability drops, they become less eager to lend, credit
begins to slow down etc. An inverted curve is the extreme case: now
banks lose money on their basic business, so the contraction cycle
goes into overdrive. So, by flattening the yield curve, the Federal Reserve
is now following directly in the footsteps of the Bank of Japan, in my
personal view. It is risking a significant and possibly permanent
decline in the future growth rate of the economy: flattening the curve
by buying treasuries, central banks remove the incentive for long-term
risk taking. Long-term investment becomes less attractive and leverage
ratios decline. is the USA heading for LOST DECADE like Japan seems likely?

Moody's Investors Services publishes bond ratings. A low rating means a bond is more likely to default. A high rating means a bond is unlikely to default. The highest bond rating is triple-A. During the financial crisis in 2007-2009, Moody's damaged its credibility by giving junky mortgage securities the coveted triple-A rating. Now it's desperate to get some of that credibility back.

U.S. Treasury bonds are rated triple-A, the highest rating there is. But that might be about to change. Moody's doesn't like the implications of the new $858 billion tax cut deal worked out between President Obama and Congress. Recently, Moody's said, "Unless there are offsetting measures, the [new tax] package will be credit negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government's triple-A rating during the next two years."

That means Moody's is thinking about lowering the U.S. government's triple-A rating. The lower your credit rating, the higher the interest rate you have to pay on your debts. The U.S. has about $14 trillion of debt. If interest rates go high enough, it could bankrupt the country. As usual, the American ratings agencies are late to the party. U.S. Treasurys have already been downgraded to double-A by analysts in two of the largest, fastest-growing emerging economies in the world: China and Brazil.

Brazil's economy is larger than all other South American countries combined. It's an important trade partner with the U.S., China, and many other countries around the world. What Brazil thinks of the U.S. government's credit rating is important.

China is the largest holder of U.S. Treasurys. It has no economic incentive to allow U.S. Treasurys to be downgraded. But it can't afford to ignore reality, either.

Just weeks ago, China and Russia announced they would no longer use U.S. dollars in their trading with one another. In 2010, the Bank of China reported a doubling of its gold holdings. Right on the cover of the November 8 issue of Barron's magazine, an ominous subhead reads, "With the dollar more vulnerable, China for the first time is investing more overseas in hard assets, like copper, oil, and iron, than in U.S. government bonds."

That's not what you do if you believe in the ultimate safety and sanctity of the U.S. government's credit rating. When foreigners start questioning the credit rating of the United States, they're essentially rejecting the U.S. dollar. It's as if a billion Coke drinkers have suddenly decided they're better off with orange juice. Imagine what would happen to Coke's stock and bonds...

In short, the jig is up. The world knows the Federal Reserve is compromising the country's credit rating. The more money the Fed prints, the higher the interest rate bond holders will demand to compensate them for the risk taken, the lower bond prices will fall.

Bonds crisis is ominous and risky. Investors should consider off-loading some of their bond investments which face the same problems as Treasurys and municipal bonds. When interest rates rise, these investments decline in value. If you're an income-focused investor, I urge you to focus on dominant dividend paying companies instead. Buy Gold and Silver to get insurance of your wealth. Real Assets are here to stay. Stocks can go down to zero but not commodities. Invest in Copper, Oil, Gold and Silver...Remember COGS

Disclaimer: This is just a research piece and not an investment advice. Investors are highly encouraged to execute their own due diligence for their investment strategy and decision.

Friday, December 17, 2010



The US economic outlook remains sluggish as economy would require time to recover. Might achieve a sub-par growth in 2011. In 2011, the U.S. economy will grow significantly more slowly than during recovery from previous recessions and unemployment will remain high. Business would hire few workers going forward. Its just like you are comparing it with the weather today: partly cloudy with a
chance of intense storms coming down the line, because we still have a
lot of fragilities out there. Recovery figures illustrate softness in the economy.

The projected “reasonable, but not extremely robust” growth of 3%
percent in real GDP and in optimistic terms, the country will weather
the current storms. However, the United State will be stuck
in low growth for a very long period of time because of high umemployment, high leverage and negative debt of the balance sheet of most corporates which are swimming in cash.

I spoke to some top executives in NEW YORK recently and there has been incredibly strong investment in equipment and software. Firms are still willing to invest, and part of the reason for that is productivity has remained quite high. The
bottom line is that the basic production machinery of the economy is
not broken.”

A 3 percent increase in consumption will power the recovery, but the country will see very little growth in jobs. Businesses are reluctant to hire permanent workers because of uncertainty about taxes, a ratio of government spending to GDP that is 2 percent higher than in the previous 50 years and is paired with declining revenue,
and concerns over health care costs.


Dollar may drop 9% percent versus the euro in 2011 as investors shun U.S. assets and drive bonds lower. It’s a bearish U.S. asset dynamic led by the bond market. This period has a set-up that is amazingly like what we saw in the 1970s, and is similar to what we saw around 1993.

The dollar will follow trading patterns from the 1970s, when the housing market experienced a decline similar to the recent drop, and the 1990s, which also saw a slump in the bond market. U.S. two-year yields doubled from a low of 3.7 percent in September 1993 to a high of 7.7 percent in December of 1994, pushing bond prices lower. Treasury yields would go higher in 2011 sending negative impact to the markets players in the global markets.

During 2011 the U.S. economy will be slowed by the effect of disillusioned behaviors causing the misallocation of economic resources during the boom years that preceded the recent recession. Housing prices will not recover in 2011 or anytime soon. It’s just not in the data. We are basically going to get many years of normal housing price growth, which is essentially zero to 1 percent in real terms. This is probably going to happen for the next decade. Recovery from this recession will continue to be less robust than after previous recessions because Americans must deleverage their
overspending during the economic boom and build up assets. Houshold debt to GDP ratio is 122%. In order to get this ratio down to 100% of GDP, would require $5-6 trillion and drag on the economy. Empirically proven.

It doesn’t mean we’re going to be sluggish forever; it just means we’ve got some work to do and it’s going to take a little bit of time. Unemployment will remain relatively high in the short run because the housing boom created a glut of construction workers — and, in some states, of mortgage workers — who must be retrained to meet demand in new fields. “The bulk of the unemployed are construction workers, but nobody’s hiring construction workers anymore.

Stockmarket investors should also think carefully before they celebrate too wildly over rising bond yields. After all, bulls were previously arguing that low yields were good news for equities, as they encouraged investors to move out of fixed-income assets in search of higher returns. On the best long-term measure, the cyclically adjusted price-earnings ratio, Wall Street looks overvalued on a multiple of 22, some 37% above the historic average. That already seems to price in a significant rebound in corporate profits.

The fundamental problem remains. In a normal American economy, with 2% inflation and 3% real GDP growth, government-bond yields ought to be around 5%. But yields at that level would be too high for the health of the housing market, the stockmarket and for other governments worldwide. The markets are no closer to resolving that dilemma than they were at the start of 2010.

Nature of economic recovery in the U.S. and Europe is quite worrisome. 41 states in USA are acting like Greece/Ireland. California, Florida, Michigan are experiencing default like situation. Moody's might cut the sovereign debt rating in the 12-18 months.

According to the survey and interviews with various amercians. People with incomes of $75,000 or more are more optimistic about the economy, while unemployment for people with college degrees is half as high as for those without degrees

These divisions across geographic and income segments cause a deterioration in political dialogue. In the U.S., the left does not want to talk to the right, which is a recipe for gridlock. In the past, government not working may not have been a bad
thing. But government not working when your fiscal deficit is 10 percent of GDP is not a good idea. Much needs to be done to bring things back under control, and that requires cooperation.

Disclaimer: This is just a research piece and not an investment advice. Investors are highly encouraged to execute their own due diligence before making any investment strategy or implementation.

Europe's economy would become 1/3 of the global economy in the next 3-years.-Threat to Euro By Shan Saeed

Europe's economy would become 1/3 of the global economy in the next 3-years. Spending cut would be a huge drag on the economy. US companies would suffer most....Threat to Euro

By Shan Saeed

Its like a train coming at you and you are not going to stop it by standing in its way…..The series of events in Euro zone were nerve shivering. Just when the market seemed to have got over its sovereign debt jitters, the Irish crisis has come back to haunt us all. Thanks to its €750 billion stabilization fund, Europe is better equipped to deal with the situation than it was earlier this year.
However, Euro zone’s economy will become weak going forward with series of bail outs and sovereign debt risk going out of the roof. Euro economy would become 1/3 of the global economy for sure.

The Greek bailout did nothing for the country's bond yields, however, which are still 9.09% higher than their German equivalents. Ireland's sovereign spread is not all that much lower, at 6.83%. Bond yields are going up, prices are down. Moody’s is cutting Spanish Sovereign rating. Investors are nervous at this topsy-turvy situation. E.U. officials had hoped the
Irish rescue, and greater clarity on future rescues, would quell
market fears of contagion spreading to other heavily indebted euro
countries, like Spain and Portugal. Spain bail out would cost $617 billion to the European Monetary Union and sleepless nights for economic managers.

Unlike Iceland, which pulled out of its own debt crisis in part by
devaluing its currency to increase exports, euro countries like
Greece, Portugal and Ireland cannot use devaluation as a way to
stimulate growth. That makes their prospects for escaping a debt
crisis look bleak because the cuts needed to control budget deficits
also depress growth. Austerity plans, belt tightening and fiscal authority have never worked because governments need to spend more , come out with stimulus to keep the economy moving .

“It’s very hard for any economy to flourish in the teeth of fiscal
austerity of this magnitude — let alone those that can’t devalue. These levels suggest a high probability that debt will not be repaid in full. So is restructuring on the cards? This is the only solution to send positive signal to the market. Bail out is not working to calm the markets or the investors.


Contagion from the European debt crisis could infect U.S. markets, and
if it does, it will happen fast. Most of the US companies drive their profits around 53% from Europe. The U.S. stock market is recovering although not in a stellar fashion,
with earnings growing in line with overall economic growth. I don’t see anything that’s rapidly going to increase the rate of U.S. growth and world growth.

The Americans borrowed an amount equal to 6 percent of G.D.P. in an
attempt to stimulate growth. The Germans spent about 1.5 percent of
G.D.P. on their stimulus.
The early returns suggest the Germans were. The American stimulus
package was supposed to create a “summer of recovery,” according to
Obama administration officials. Job growth was supposed to be surging
at up to 500,000 a month. Instead, the U.S. economy is scuffling
along. The German economy, on the other hand, is growing at a sizzling (and
obviously unsustainable) 9 percent annual rate. Unemployment in
Germany has come down to pre-crisis levels.

But the results do underline one essential truth: Stimulus size is not
the key factor in determining how quickly a country emerges from
recession. The U.S. tried big, but is emerging slowly. The Germans
tried small, and are recovering nicely.

The economy can’t be played like a piano — press a fiscal key here and
the right job creation notes come out over there. Instead, economic
management is more like parenting. If you instill good values and
create a secure climate then, through some mysterious process you will
never understand, things will probably end well.

Over the past few years, the Germans have built on their advantages.
They effectively support basic research and worker training. They have
also taken brave measures to minimize their disadvantages.
The Germans have recently reduced labor market regulation, increased wage
flexibility and taken strong measures to balance budgets.

In the U.S., policy makers inherited a different economic model, one
that also has certain advantages. It fosters disruptive innovation (of
the sort useful in Silicon Valley). It also has certain disadvantages
— a penchant for over-consumption and short term thinking.


Banking stress tests were not stringent enough to sustain this pressure. Classic case studies of 2 banks in Ireland that succumbed to the pressure of sovereign debt risk. Bank of Ireland and Allied Irish Bank were asked to raise capital to remain safe and secure in the financial market. Although they did clear the stress test.


Markets, meanwhile, continue to suffer from fears that Europe won't contain its debt woes. Europe’s economy will become 1/3rd of the global economy and getting into the sluggish mode.
European markets have taken a beating lately due to concerns that
economic crises in Ireland will spread to countries such as Spain and
Portugal. Spain crisis would be the real stress for the policy makers taking into account the size of its economy i.e. GDP size $1.47 trillion twice the size of Greece, Portugal and Ireland. In other words, close to half of Germany’s GDP $3.35 trillion

And what is Spain’s fiscal deficit? Last year, it was officially 7.9% of GDP—twice the EU limit. Not Irish or Portuguese or much less Greek numbers, but still up there—officially. Why do I say “officially”? And now put “officially” in scare quotes? Because of a very disturbing anonymous paper, released last September on 30 2009.

It basically said that the Spanish GDP numbers for 2009 were cooked—and then went ahead and showed the whys and hows of this analysis. FT originally ran the piece—and it was picked up by everybody, freaking everyone out. But then FT retracted under political pressure, excusing their cowardice by saying “life is too short”. Let’s look at Greece and Ireland:

Originally it was thought that €45 billion would be enough to bail out Greece—but the final tally for that looked to be something like €90 billion [about $122 billion]. At this time, bailing out Ireland is going to come to something similar over the next 3 years—€90 billion—assuming, of course, there aren’t any hidden nightmares in the Irish banking sector, which is the reason Ireland is going under. In both these cases, essentially three times the yearly deficit was the ballpark figure for the European bailouts.

Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.

Look at that number again—look at it closely, and take your time: €450 billion.

That’s twice the size of Ireland’s total GDP for 2009. In order to figure out how much each party would have to shoulder of this €450 billion price tag.

According to Paul Krugman, it was essentially advocating war as a fiscal stimulus solution...But figures are fudged. Taking into account, the considerable bad things about Greece, regarding faked GDP data[ Courtesy Goldman Sachs ] —and knowing the Spanish—I wouldn’t be a bit surprised that Spanish GDP figures have been faked in Madrid, in order to keep everything copacetic. Compare Spain and USA. What’s striking about Spain, from an American perspective, is how much its economic story resembles liKe US. Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst, and has experienced a surge in unemployment. And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs.
But unlike America, Spain is now going deep into debt crisis. The U.S. government is having no trouble financing its deficit, with interest rates on long-term federal debt under 3 percent. Spain, by contrast, has seen its borrowing cost shoot up in recent weeks, reflecting growing fears of a possible future default. Why is Spain in so much trouble? In a word, it’s the euro.
Spain was among the most enthusiastic adopters of the euro back in 1999, when the currency was introduced. And for a while things seemed to go swimmingly: European funds poured into Spain, powering private-sector spending, and the Spanish economy experienced rapid growth.
Through the good years, by the way, the Spanish government appeared to be a model of both fiscal and financial responsibility: unlike Greece, it ran budget surpluses, and unlike Ireland, it tried hard (though with only partial success) to regulate its banks. At the end of 2007 Spain’s public debt, as a share of the economy, was only about half as high as Germany’s, and even now its banks are in nowhere near as bad shape as Ireland’s.
But problems were developing under the surface. During the boom, prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.
Now what? If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors.
And internal devaluation is an ugly affair. For one thing, it’s slow: it normally take years of high unemployment to push wages down. Beyond that, falling wages mean falling incomes, while debt stays the same. So internal devaluation worsens the private sector’s debt problems. What all this means for Spain is very poor economic prospects over the next few years. America’s recovery has been disappointing, especially in terms of jobs — but at least we’ve seen some growth, with real G.D.P. more or less back to its pre-crisis peak, and we can reasonably expect future growth to help bring our deficit under control. Spain, on the other hand, hasn’t recovered at all. And the lack of recovery translates into fears about Spain’s fiscal future.
Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway — which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain — it’s hard to see any Spanish government taking the risk of “de-euroizing.”

But even if they haven’t been, it’s not as if the official numbers are painting a rosy picture: Spain has nearly 20% unemployment, near 10% yearly fiscal deficit to GDP, and no clear way how to get out of this hole that it is in. So much of Spanish growth over the last decade was fueled by real estate development and over-leveraging, that there’s no clear way forward for the Spanish economy.

Ireland has accepted a bailout package to rescue its banking sector,
but the problem with European bailouts is that
those countries aiding their neighbors are dealing with their own
economic problems as well.

I look to Europe, and I’m wondering who’s supporting who over there.
These are not wealthy nations, any of them, and they are supporting
their weakest members. I don't see how it could help but
be contagion. Whether we like it or not we live in a global world and any kind of
contagion is going to spread very quickly.


Another idea that has gained some ground recently is a Brady plan for
indebted European economies. The plan was recently put forward by a
former Treasury secretary, Nicholas F. Brady, who led an effort in
1989 to help Mexico and other Latin American economies restructure
their debt — requiring bondholders to take a loss of 30 percent in
exchange for new, longer dated debt instruments that had lower rates
and were backed by 30-year United States zero-coupon bonds. Much
criticized at the time, the plan is now seen as the first step of
Latin America’s recovery.


The worry is that Ireland won't mark the end of the eurozone crisis
and with the economies of Portugal and Spain looking less than robust,
markets are worried that we could be talking about potential bailouts
once again in the not-too-distant future. European officials concede that, for euro-zone nations unable to
devalue, the process of adjustment may be long and painful. Internal devaluation would be a drag on the economies opting out of Euro Single Currency. Their
strategy is to push structural changes and new rules based on the
lessons of the crisis, in hopes of preventing such divergences in the

European Central Bank policymaker are increasing their efforts to bolster
market confidence in the eurozone's rescue for Ireland, informing the cagey
investors they should have faith in the plan's success. They are goading the investors as they are dealing with Ireland to bring down Dublin's borrowing costs to more normal levels. "There is no reason to doubt the recovery plans of the two countries. But market reaction showed investors thought the crisis that started with Greece's budget blow-out more than a year ago was far from over.

I don't think this is going to be a silver bullet. I think there are
still going to be some question marks on Portugal and Spain. Moody’s is cutting the AA rating on Spanish sovereign bonds, thus sending ripples in the financial market. One of the questions that has been dogging markets for weeks and
helped drive Ireland off the cliff was whether and under what
circumstances private bondholders could be made to take losses, or
"haircuts," on eurozone government debt. Overall economic growth in the euro zone is expected to be 1.51 percent in 2011, slightly lower than the projection for 2010. .

Even as the yields on the 10-year bonds of Greece, Ireland, Portugal
and Spain are going higher and bond holders are looking elsewhere to diversify their risk and get of the market, EU officials haave been lackluster in their approach to solve this pressing issue. Rising
yields reflect increased risk in the eyes of investors as well as
inflationary expectations. Not that anyone expects Germany, by far
Europe’s most powerful economy, to come close to defaulting on its
debt. And neither Italy nor Belgium is considered in the same boat as
Greece, Ireland and Portugal, since their deficits are lower and they
borrow primarily from domestic lenders. Instead, the fear is that
Europe’s strategy so far — painfully drawn out step-by-step bailouts
of Greece and Ireland — has failed to impress the markets and that the
burden to finance even larger rescues for Spain and perhaps even Italy, Belgium or Portugal would be too much for Germany to bear, both financially and

Current cycle of soaring bond yields among European economies to the
series of competitive devaluations that led to the collapse in the
early 1990s of the European Exchange Rate Mechanism, the precursor to
today’s monetary union that binds the 16 nations in the euro zone.
We can clue from someone [ De Grauwe] who proposed transforming Europe’s rescue facility into a
European equivalent of the I.M.F., but other specialists advocate that
Europe is not prepared to undertake the long and political challenging
treaty revisions that would be required to bring it to life. Still
others acknowledge that some form of restructuring is crucial.
just as investors of Dubai World were required to
share the pain in return for a rescue by Abu Dhabi, so should
bondholders in Irish banks. It was not easy, but in the end all the creditors accepted it.

This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making an investment decision or strategy implementation.

Thursday, December 16, 2010

Number 1 reason you should have Gold and Silver---Shan Saeed

Analysts and pundits provide various reasons for the bull market in gold. This includes emerging market demand, low interest rates, QE/money printing, central bank accumulation, central bank policies and falling gold production. These are all good reason but there is one reason which stands apart and will drive precious metals to amazing heights. It is the impending sovereign debt default of the Western Europe, led by the great USA.

If this happens you will remember me:

Quantitative Easing will go global. I can guarantee you. Japan will buy bonds, ECB will start buying bonds and UK will do the same thru QE to keep the economy moving.

Government Debt

Government finances have reached a point where default and/or bankruptcy is unavoidable. After all, they have already started to monetize the debt. The inflection point is when total debt reaches a point where the interest on the debt accumulates in an exponential fashion, engulfing the government’s budget. When this occurs at a time when the economy is already weak and running deficits, there essentially is no way out.

Significant runaway inflation and currency depreciation result from a government that essentially can no longer fund itself. It starts when the market analyzes the problem and moves rates higher. The government then has to monetize its debts to prevent interest rates from rising. Let me explain where and why severe inflation is unavoidable and likely coming in the next two to three years.

In FY2010, the US government paid $414 Billion in interest expenses which equates to 17% of revenue. When you account for the $14 Trillion in total debt, that works out to be 2.96% in interest. In FY2007, total debt was $8.95 Trillion, but the interest expense was $430 Billion and 17% of revenue. That accounts for an interest rate of 4.80%. Luckily, rates have stayed low for the past two years. Zero rate policy will continue till 2011. QE2 will give way to QE 3 and QE will get global while entering into Japan, Europe and UK very soon.

However, in the next 24 months the situation could grow dire. At least $2 Trillion will be added to the national debt. At an interest rate of only 4.0%, the interest expense would be $600 Billion. Even if we assume 7% growth in tax revenue, the interest expense would total 22% of the budget. An interest rate of 4.5% would equate to 26% of the budget.

As far as what level of interest expense is the threshold for pain. Once interest payments take 30% of tax revenues, a country has an out of control debt trap issue. When you clearly think about it, this just makes sense, as the ability to dodge, weave and defer is pretty much removed, as is the logic that it will be repaid in a low-risk manner. The world is going to be a different place when the US is perceived to be in a debt trap.

Is there any way out of this? Either the economy needs to start growing very fast or interest rates need to stay below 3% until the economy can recover. Clearly, neither is likely. Interest rates are now the most important variable. If rates stay above 4% or 4.5% for an extended period of time, then there is no turning back.

In 2011 and 2012, the Fed will have two new problems on its hands. First, the Federal Reserve will be fighting a new bear market in bonds. They will be fighting the trend. They didn’t have that problem in 2008-2010. Furthermore, the interest on the debt will exceed 20% of revenue, so the Fed will have to monetize more as it is. US dollar will stay weak due to QE2. It wont fix the economy. Ironically, the greater monetization will only put more upward pressure on interest rates, the very thing Captain Ben and company will be fighting against. According to citigroup latest report.
The dollar may drop 11 percent versus the euro next year as investors shun U.S. assets and drive bonds lower. It’s a bearish U.S. asset dynamic led by the bond market. This period has a set-up that is amazingly like what we saw in the ‘70s, and is similar to what we saw around 1993.

The dollar will follow trading patterns from the 1970s, when the housing market experienced a decline similar to the recent drop, and the 1990s, which also saw a slump in the bond market. U.S. two-year yields doubled from a low of 3.7 percent in September 1993 to a high of 7.7 percent in December of 1994, pushing bond prices lower.

The US Dollar/ greenback will follow Treasury lower next year as investor concern mounts the housing-market recovery will remain constrained and as the Federal Reserve pumps $600 billion into U.S. debt to help a slowing economic recovery. According to Kansas City Fed President Hoenig, the recovery simply cannot be sped up and that Fed Chief Ben Bernanke’s efforts to avoid a double-dip by printing money are nothing less than “a bargain with the devil.”

He has been a sometimes lonely dissenter on the Fed’s rate-setting committee, fears that the latest foray into easy money, the $600 billion bond buyback plan announced in November, is an unusually risky move.He also believes that the repeated promises to keep rates at virtually zero for “an extended period” are a mistake. It is widely believed that the Fed has kept rates too low for too long before. It is my concern that, by understandably wanting to see things move more quickly, we create the conditions for repeating the mistakes of the past.

Even so, Hoenig couches his warnings in caveats: “I don’t want to say that I’m right and someone else is wrong, “Only time will tell whether I’m correct.”

The US economy is stuck in a rut of very high unemployment, yet a bill to extend the Bush tax cuts for two years could prove a shot in the arm. Even so, it’s not enough to warrant a shift in Fed policy for now. The potential changes in fiscal policy will almost certainly be discussed at the meeting, but the statement will likely shy away from any mention of this contentious topic.

As you can analyze, there is really no way out of this mess which also includes the states, Europe[ PIIGS], England and Japan. This is why gold and silver are acting stronger than at any other point in this bull market. They’ve performed great when rates were low but are likely to perform even better when rates start to rise. This is why I urge and implore you to at least consider gold and silver.

This is just a research piece and not an investment advice. Investors are encouraged to perform their own due diligence for any investment and decision making as per their risk profile.

Wednesday, December 15, 2010

Bullish on Indonesia for the next 5 years-----By Shan Saeed

Asia financial crisis in 1997-98 badly hit the Indonesian economy that its currency Rupiah depreciated its value by 81% against the US Dollar. President Suharto and its son Tommy were sent out of the government office in May-1998. Corruption, cronyism, farce real estate and capitalistic confined attitude were the order of the day. But, now after 12 years, the country is reaping benefits of its natural resources, massive direct foreign investment, productive labor and stable political system. China is making huge investment in this country of 17,000 islands. Mining is one area.

Indonesia's mining sector has year to date attracted over $7bn in bank financing, already significantly more than the figure for the last year, and the trend is set to continue further. 2010 has been the boon year for the Indonesian economy with highest population in the Muslim world of 230 million people in the South East Asian region. Bankers are flooding into this market with huge potential of financing in this country of exploiting natural resources. China has already secured Strait of Malacca that is between Indonesia and Malaysia for its 83% Oil supplies route.

Indonesia's mining sector has attracted 62 trillion rupiah, or $7 billion in bank financing up to this year, surpassing 43 trillion rupiah for all of 2009, and is set to grow further in coming years due to strong demand and escalating prices of minerals.

The figure far exceeds the 17 trillion rupiah that banks loaned to the mining industry in 2006, figures from Bank Indonesia show, despite current uncertainties over the country's new mining law.

The growing industry has persuaded banks to extend loans to develop
mines and for support activities such as transportation. Indonesia's mining industry has been growing fast in the last five years because of demand from markets like China and India.


Financing has been one of the main concerns in launching projects in
Indonesia, particularly in the absence of longer-term mining deals --
contracts under the 1967 mining law that has been abolished under a
new mining law issued in 2009 and replaced with shorter-term mining

But with prices of mining resources such as coal hitting more than
$100 a tonne, along with strong economic growth in Indonesia and Asia,
less focus will be given to risks surrounding the new regulations,

Indonesia is Indonesia. A Country of 17,000 islands and rich in coal, oil, natural gas, timber and sandy beaches. It is still considered a high-risk area. There is strong interest, as, from a banking perspective, I don't see any new issues coming out from the new mining law.Financing for mining will be mostly on coal projects, which are easier to extract compared with base metals such as copper and nickel.

Some regional governments and private companies have launched railway
projects in in the main coal-producing regions of Kalimantan and
Sumatra. PT Bumi is the biggest coal producer in the country. There will be more interest for financing mining infrastructure.Banks view it as more safe and less-risky because there is government back-up for projects in railway, ports or logistic. Indonesia has forecast coal output to increase by 19 percent next year, while tin output is expected to rise to 95,097 tonnes from 54,646 tonnes this year.


Indonesia has struggled to attract foreign investments into mining in
recent years due to widespread corruption and uncertainties
surrounding the mining regulations.

But Southeast Asia's largest economy is expected to grow more than 6.2% this year, which together with increased political stability, are attracting strong foreign capital inflows to its bonds and stock markets as well as the mining sector, as investors and banks hope for further reforms. According to World Bank and IMF report, "Indonesia has a stable economic outlook and is fundamentally sound. If this continues until 2014, it will boost interest among investors globally. GDP growth in 2009 touched over 5%, currency appreciated 17% against US dollar, FDI reached $10 billion. Investors are coming in with new capital as local investors are bullish on the economy.

While the regulations contain many unresolved issues which could delay
projects and the award of tenders and permits that they offer investors some direction on the government's mining policy. Some banks are still very cautious about giving loans because the government has not yet rolled out the rest of the regulations. But it will change when all the regulations are well in-place.

One key regulation still in the pipeline is the process of tendering mining areas that will be crucial for investors to obtain mining permits in the future.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own Due Diligence and investment strategy as per their risk appetite and time-frame of their investment

Wednesday, November 24, 2010

Spain crisis will require $600 billion for bail out--Danger for Euro-----by Shan Saeed

For Europe’s Future, Spain Is All That Matters. Spain requires $600 billion bail out. Firstly, it was Greece, in crisis mode—then last week, it was Ireland—and coming up next is Portugal— but all those pale in comparison to Spain.

If I had to bet on which country will bring about the end of the Euro—and perhaps even the end of the European Union—I’d have to say it’s Spain. Right now, no one is talking about Spain—Spanish spreads are as quiet as a guilty man in a police line-up—everyone’s too concerned over Ireland, and the upcoming Portuguese Situation.

But Spain is the key—Spain is what you should be paying attention to, if you want to find out what will happen to the European Monetary Union (EMU), and the European Union (EU) itself.

Recap of last week’s exciting episode of I’m an Insolvent Nation—Get Me Out Of Here!:

Ireland got into trouble with the Euro bond markets after German Chancellor Angela Merkel made some not-very-clever remarks about Irish bond-holders needing to take some haircuts. The bond markets started to panic—yields on Irish debt started to widen—and then once again, it’s Sovereign Debt Panic Time. Poor communication strategy from European Leadership. Brinkmanship has yet to arrive in Europe.

The EU in conjunction with the European Central Bank (ECB) and the International Monetary Fund (IMF) put together a rescue package—but the Irish refused to take it, as they realized they would have to give up some of their hard-won sovereignty in exchange for this lifeline. To accede to this package, they’d likely have to slash government expenditures, take on “austerity measures”, and likely raise their precious 12.5% corporate income tax rate, which has been the carrot the Irish have used to get so much foreign investment over the last decade.

But the Irish deterioration in the bond markets began to pick up speed—finally on Sunday night, after a week of dithering, Irish Prime Minister Brian Cowen officially asked the European Union for a bail out. Bail out is not the solution but restructuring of loans over a long run....I am favor of Restructuring of debt. Why waste Tax-payers funds for these bad mistakes of the government. Sovereign default risk will continue to rise.

For Layman
Ireland is running a deficit, it needs to sell bonds—that is, borrow money—in order to finance its fiscal shortfall. If the bond markets do not have much faith that Ireland will pay back the bonds it emits, then the price of Irish bonds will go lower, which means the yields will go higher. In other words, Ireland will be forced to pay more for the money it is borrowing. The more it has to pay to borrow money, the greater the deficit, until finally, you get to the point where you cannot borrow enough to cover your deficit: In other words, you go broke. This was what was happening to Ireland, in simple terms

Just like they did with Greece, the European officials colossally messed up the bail-out package for Ireland. It turns out that—far from having put together a detailed package that could be swiftly implemented, and thereby restore confidence—the EU/ECB/IMF troika have only a flimsy framework for the Irish bailout. The vaunted European Financial Stability Facility? It’s not even fully funded yet!

So on Monday, the markets were jubilant—“Ireland is saved! Crisis averted!”—but then today Tuesday, they’re down in the dumps, as it is becoming increasingly clear how unprepared the European officials are. Their “rescue package” is vague on the details—to put it mildly.

Coupled to that, the bail-out announcement sparked a political fire-storm in Ireland—Cowen’s coalition partners, the Green Party, exited the government, and elections are now scheduled for January. There are even calls from Cowen’s own party for his immediate resignation.

This is bad enough—so what does the IMF go and do? Why, with exquisite political tone-deafness, it sends the clear message that Ireland is going to have to crawl if it wants the bail out: John Lipsky, a muckety-muck in the IMF, explains to Reuters that “our work there [in Ireland] is technical, not political. Decisions have to be made by [the Irish] government.” In other words, the IMF isn’t going to negotiate with Ireland—it’s going to dictate the terms and conditions.

Or in other words, the IMF is saying, Beg for the money, We will bail you out. So any effective clean-up of the Irish situation is going to take a while—assuming it actually happens. And just like the Greek bail-out last spring, it will be messy messy messy: Half-measures, dithering, “adjusted” figures, until finally the European officials wind up throwing twice as much money at the problem as originally expected. We might as well call the movie now playing in Dublin, Doin’ It Greek, Part II: Ireland!

To add insult to injury, all this politico-economic theater didn’t staunch what most worried the EU and the ECB: Contagion.

All the smaller, weaker European economies in the EMU are in the same boat as Ireland: They are all insolvent. Not just the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—but also Belgium, and maybe even France, if we steel ourselves and look at the numbers.

Right now, though, contagion has reached Portugal—the next-weakest link in the European Chain:

Portuguese debt yields are widening by about 50 basis point this morning, to 4.328% over the German bunds (10-year)—even after the Portuguese government implemented a second austerity package this past October, following their May spending cuts which did not convince the bond markets.

That’s because the Portuguese have a huge fiscal deficit: 9.4% of GDP. They are cutting spending, and they are raising taxes too—but still, their bond yields are rising: The market doesn’t think that Portugal will make it through this crisis intact. Just like Greece, just like Ireland, the Portuguese will need to be bailed out. European union, ECB and big country [ Germany] will have to do lot of running around......

And so that clears the way for the bond market’s anxieties to focus on the real elephant in the drawing room:


According to IMF numbers for 2009,

GDP OF Greece $331 billion,
GDP OF Ireland $221 billion,
GDP OF Portugal $233 billion, &
GDP OF Spain $1.47 Trillion

Spain’s GDP is roughly twice Greece, Ireland and Portugal combined. In other words, close to half of Germany’s GDP.

And what is Spain’s fiscal deficit? Last year, it was officially 7.9% of GDP—twice the EU limit. Not Irish or Portuguese or much less Greek numbers, but still up there—officially.

Why do I say “officially”? And now put “officially” in scare quotes? Because of a very disturbing anonymous paper, released last September 30 2009.

It basically said that the Spanish GDP numbers for 2009 were cooked—and then went ahead and showed the whys and hows of this analysis. FT originally ran the piece—and it was picked up by everybody, freaking everyone out. But then FT retracted under political pressure, excusing their cowardice by saying “life is too short”.

According to as pointed out by Paul Krugman was essentially advocating war as a fiscal stimulus solution...But figures are fudged. Taking into account, the considerable bad things about Greece, regarding faked GDP data—and knowing the Spanish—I wouldn’t be a bit surprised that Spanish GDP figures have been faked in Madrid, in order to keep everything copacetic.

But even if they haven’t been, it’s not as if the official numbers are painting a rosy picture: Spain has nearly 20% unemployment, near 10% yearly fiscal deficit to GDP, and no clear way how to get out of this hole that it is in. So much of Spanish growth over the last decade was fueled by real estate development and over-levaraging, that there’s no clear way forward for the Spanish.

Now, if there is a Greek/Irish-style crisis with Spain—in other words, if there is a run on Spanish debt—how much will the EU/ECB/IMF have to pony up, to bail out Spain?

Let’s look at Greece and Ireland:

Originally it was thought that €45 billion would be enough to bail out Greece—but the final tally for that looked to be something like €90 billion (about $122 billion). At this time, bailing out Ireland is going to come to something similar over the next 3 years—€90 billion—assuming, of course, there aren’t any hidden nightmares in the Irish banking sector, which is the reason Ireland is going under.

In both these cases, essentially three times the yearly deficit was the ballpark figure for the European bailouts.

Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.

Look at that number again—look at it closely, and take your time:

€450 billion.

That’s twice the size of Ireland’s total GDP for 2009. In order to figure out how much each party would have to shoulder of this €450 billion price tag.

Fair enough: If we go by Greek and Irish percentages, then roughly a third of that €450 billion price tag to bail out Spain would be shouldered by the IMF—and as everyone knows, the U.S. puts up 20% of IMF money. So the U.S. would be on the line for €30 billion—$40 billion—to save Spain. American banks exposure is roughly $77 billion. Safe bet. The U.S. is going to say ‘Yes’ to that and ‘No’ to California? No way. Not going to happen with this new Congress.” But the question is, will the US saved Spain? No way will the U.S. shell out $77 billion to save Spain.

Therefore, the IMF’s participation in a Spanish bail-out will be severely reduced, if not marginal. Therefore, bailing out Spain will be a strictly European affair.

Does Europe have €450 billion to bail out Spain? That is, does Germany have €450 billion to bail out Spain? No it does not. It does not have the money for such a bailout—and even if it did, it does not have the political will to push through such a bailout. Period.

But even if—by some monumental financial miracle coupled to an equally monumental political miracle—Europe somehow managed to find the money to bail out Spain without depreciating the Euro? What then?

The Spanish economy won’t be improving any time soon—and neither will the economies of the other smaller countries like Greece, Ireland, Portugal, Belgium. Not when they’re locked into the Euro, and are therefore unable to depreciate in order to spur growth and investment.

See, even if there is the money and the political will to save Spain—which I don’t believe—the only way to bail out Spain in such a way that it has an economic future is to cut it loose from the Euro. If it is kept locked in the EMU, the Euro will become a weight around its neck, dragging its economy down until in a few years, there will be the need for yet another bail out of Spain. That goes doubly so for the smaller countries, like Greece, Ireland, Portugal, Belgium.

Therefore, I believe that if and when there is a run on Spanish sovereign debt, and Spain slips into the position of having to be bailed out like Greece and Ireland, that will be Cruncht ime Europe: That will force an inevitable realignment of the European economy, and the European continent.

Best case?

Though they remain in the European Union, the weaker economies exit the EMU and go back to local currencies, which they quickly depreciate, while their Euro-denominated sovereign debts are restructured and paid off over time. The Euro becomes the currency of France, Germany, Holland, Finland and Austria.

Worst case?

I can imagine a number of worst cases, all of them different, except for one thing in common: They’ll all be bad.

Disclaimer: This is just a research piece and not an investment advice. Please execute your own due diligence before making or taking any investment decisions to invest in countries, stocks, bonds, equities, commodities, real estate and currencies

Monday, November 22, 2010

Prepare for the next bank's crisis---By Shan Saeed

Get ready for the next crisis in the banking industry. During the housing boom, banks underwrote over $2.1 trillion in subprime, alt-A and option-adjustable rate mortgages underwriting could have losses as high as $727 billion.
The problem is, they weren’t particularly careful in how they performed their duties.

Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create a potential liability for the banks. The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. So the potnetial in banks stockes pull-back is inevitable.

Investors who bought this mostly AAA rated junk as mortgage-backed securities are not simply going to swallow the losses quietly. These investors –including Fannie Mae, Freddie Mac, Pacific Investment Management (PIMCO) and BlackRock (BLK) are seeking redress. Under certain circumstances, the terms of their purchase agreements allow them to put back the mortgages to the banks.

Bank of America, with its still awful Countrywide and Merrill acquisitions, has the greatest exposure, at over $35 billion. Citigroup somehow has a mere $8B in potential putback losses.

A Potentially Big Hit
Big banks could lose $134 billion if mortgage securities are put back to them, according to Compass Point Research & Trading.

Company/Ticker Estimated
Loss (bil) Per
Share* % Tangible
Book Value
Bank of America /BAC
$35.2 $2.11 17%
JPMorgan Chase /JPM
23.9 3.59 13
Deutsche Bank /DB
14.1 12.56 21
Goldman Sachs /GS
11.2 12.43 11
RBS Greenwich /RBS
9.4 0.10 12
Credit Suisse /CS
8.9 4.50 22
8.4 1.32 15
Morgan Stanley /MS
7.9 3.37 14
Citigroup /C
7.8 0.16 4
Barclays /BCS
3.6 0.18 3
3.5 0.22 2
Total 133.8


Sources: Compass Point Research & Trading LLC; Bloomberg; Inside MBS & ABS Asset Backed Alert

How to prepare to avoid these crises?
Banking issues are clearly resurfacing in recent months as the sovereign debt crisis flares up again and the mortgage fiasco in the U.S. comes to light. In addition, there is a very serious risk that a housing double dip will exacerbate all of these problems. Several reports in recent weeks support my theory that housing prices are indeed set to decline further in 2011. There are additional risks, however, and many of these issues are in fact being exacerbated by the Federal Reserve itself. In my recent presentation on TV, I have clearly highlighted why I believe the next US banking crisis is right around the corner and why the Fed is in large part to thank:

Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
Unfortunately, measured in dollars, gross interest revenue ofthe banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks, savers are literally dying from lack of yield on assets due to QE/ZIRP. History is the guide to illustrate and validate my point which holds water.
In the post WWII period, Fed interest rate cuts resulted in significant reduction in average mortgage borrowing costs for households ‐‐ until 2008, when mortgage rates implied by the bond market fell significantly but households were not able to refinance.
Fees charged by Fannie Mae and Freddie Mac, and a mortgage origination cartel led by the big four banks (BAC, WFC, JPM, C), are now 4‐5 points on new origination loans vs. less than 1 point during housing boom. Huge subsidy for largest zombie banks effectively blocks refinancing by millions of households.
These fees, which can add up to 7 to 10% of the face value of the loan, raise mortgage rates to borrowers by hundreds of basis points. Banks and the housing GSEs, however, saw significant benefits in declines in funding costs thanks to low fed funds rates.
Opportunities in distressed state:

For banks and investors, one of the biggest opportunities for gain is to invest in the stronger regional banks that are acquiring troubled or failed institutions. Resolution results in losses, but also creates value for investors and society.
Acquiring failed banks from the FDIC is extremely attractive for existing banks, which tend to get preference from regulators in failed bank sales. Attractive pricing, lack of legacy liabilities key positives for investment thesis.
Another way for investors to exploit the bank restructuring process is to purchase troubled assets. So far, Fed QE and ZIRP are enabling banks to resist selling bad assets.
In addition, the FDIC, NCUA and other agencies are issuing RMBS and CMBS securities with government guarantees that offer attractive yields compared with Treasury debt.

The U.S. banking industry entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses. We are less than ¼ of the way through foreclosures. The issue is recognizing existing losses ‐‐ not if a loss occurred.
Failure by the Bush/Obama to restructure the largest banks during 2008‐ 2009 period only means that this process is going to occur over next three to five years–whether we like it or not. Lower growth, employment are the cost of this lack of courage and vision. Deleveraging in consumers is on the rise.....
The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses. The latter course condemns Americans to years of economic malaise and further job losses.

Source: Institutional Risk Analytics

The new Basel III banking rules will leave the biggest U.S. banks short of between $100 billion and $150 billion in equity capital, with 90 percent of the shortfall concentrated in the top six banks.

Banks will need to hold top quality capital equal to 8 percent of their total assets — a one point cushion against falling below the effective global minimum of 7 percent set in September by the Basel Committee on Banking Supervision.

The regulations mean banks may need to increase their capital through

1. Retained earnings OR
2. Issuing equity OR
3. Banks need to cut their risk-weighted assets by selling off assets
and cutting back riskier business.

These shortfalls are entirely manageable. But the big and the more difficult question is what affect the new rules will have on the i) COST, ii) AVAILABILITY OF CREDIT & iii) BANKS PROFITABILITY. US banks can cut their equity needs by $10 billion with each $125 billion reduction in risk-weighted assets. Get ready for more headwinds and nosie coming out of the market. More Blood would be bleeding from the global financial system. Will PIIGS reduce some blood in the financial markets remain to be seen. Portugal and Spain are next in line of fire.

Disclaimer: This is just a research piece and not an investment advice. Investors and readers are encouraged to execute their own Due diligence for the strategic investment decision in the long run.

Monday, November 15, 2010

Recipe for US dollar disaster --By Shan Saeed

Debasing of US dollar will not help the US economic growth or exports. It might be a tactical manouevring for limited short-term benefits. This strategy is not sustainable.

Federal Reserve’s accommodative policy will keep pushing the dollar lower, so investors would eventually buy foreign currencies like Aussie / Canadian Dollar[ commodity currencies], Gold and Silver to protect their wealth. Indeed, the precious metals may ultimately touch new highs going forward.

Fed strategy of increasing monetary base is ominous for the long run. It’s money printing in its simplest form. It drives up the cost of goods. It’s just a recipe for disaster. And it won’t do very much at all for the unemployment rate. I don’t think a country has ever prospered historically by diluting or debasing the value of its currency. In this case..US DOLLAR

Obama administration is hypocritical in calling for China to boost the value of the yuan. It is not the Chinese yuan but the US dollar which is the problem..Yuan has appreicated 24% against US dollar in the last 5 years. Currency war is initiated by US to replicate the 1930's scenario to punish the chinese when it abandoned silver standards. US is intentionally holding down the value of its currency. Benefits? To boost exports, create a bubble in the emerging market to have ripple effect on the global economy.

The reason Chinese don’t budge nearly as much as they possibly should is simple. They understand the US STRATEGY for dollar and chinese yuan. A weak dollar is never in the national or global interest. It’s never in my interest to have my dollars worth 80 cents. Strong dollar will provide confidence to the investors globally. This is strategically helpful for the US Dollar.

But I expect that the greenback would go down further. Maybe losing 5-7% of its value against the basket of currencies. I do think that FED will continue to undermine the dollar for the short-run. It is widely anticipated that more quantitative easing from the Fed. Thats the only game plan.

Strategy is simple

To flood the market with access cash and to throw more money in the emerging markets to create an asset bubble. This is strange that they don’t have a clue about true economics, or they are deliberatng ignoring for a short-term benefit. Lifting investors confidence with too much liquidity in the financial markets.

The Fed is highly unlikely to pull back from its easing in time to avert inflation. Their speeches will guide you that they’re pre-emptive on inflation. They’ll hike rates when they see signs of this thing happening. Precarious

The problem is that by the time you see signs of this thing happening, it’s already getting out of hand. It takes six to 12 months for a rate hike to take effect. Proven empirical studies illustrate that. So the question is how should investors deal with this sorry state of affairs? Buy foreign currencies — the Australian dollar or real asset or currencies like GOLD or SILVER.

Australia is raising interest rates, so you earn more income than in greenbacks. Investors are buying a currency that’s appreciating against the U.S. dollar and can rise in the face of inflation, because Australia’s a major commodity exporter.

As for as gold is concern, I think it ultimately has more room for upsurge since it is moving in parabolic form. It’s poised for a pullback in the near term. But, long-term, could it top $1,500/ounce in the next 14-months. I predicted Silver touching $27/ ounce in 18 months ...Silver kissed $27/ounce and pulled back..Bullish for its upside.

Disclaimer: This is just a research piece and not an investment advice..Inestors are encouraged to execute their own DD and investment strategy analysis

Real estate market in USA is facing headwinds---Shan Saeed

I have been sharing my analysis with my friends and assocaites..Where is the Housing Market of US heading towards? Down-hill....

More bad news for the housing market is coming up. The housing figures released their third quarter report and it largely echos: Double dip or somersault is coming. Home values fell an average -4.3% in the third quarter. This is quite ominous. The housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next fall i.e. 2011.

It is widely expected that the unceasing declines in home values signal that we’re in for a long, bleak winter of continued troubles for the housing market. The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn, and, with encouraging signs fading, will easily eclipse it in the coming months. Fire sale is going to get HOT....

The number of foreclosures reached a new all-time high and that the number of homeowners under the bridge on their loan has now reached 2% – a high this year. Depressing..Valutations are down by 57% since the start of this financial meltdown.

The high percentage of homeowners in negative equity continues to be troubling, in that it represents a huge number of people who are not only more vulnerable to foreclosure, but who are essentially trapped in their current homes and are prevented from selling and buying a new home. This has profound implications for future demand and will be a millstone around the neck of the housing market. Consumers are uncertain with deleveraging taking its hold.

Housing market is playing out almost exactly as I predicted last summer. This is pure demand-supply dynamics at work. The overhang of inventory is crushing meager demand and the mortgage mess isn’t helping matters as shadow inventory is pushed further into the future. Housing market was the domino that set the credit crisis in motion in 2007 and it could pose a very serious risk in 2011.

Disclaimer: This is just a research piece and not an investment advice..Investors are encouraged to execute their own DD and investment strategy analysis.

Tuesday, November 9, 2010

What will cause the next crisis? By Shan Saeed

Get ready before the hard times hit you badly......By Shan Saeed

It's not going to be another Lehman that happened on 15th September, 2008

A failure of a bank or major corporation won't cut it anymore. Governments globally have shown they're willing to step in and bail out private enterprise to any tune.

Last year, it looked like another crisis might arise with the failure of a government. But the Greek crisis back in May 2010 showed that governments are also willing to step in and bail out other governments. PIGS is still a threat to the economic and financial stability of euro...

So what should we be looking for as a potential trigger to another financial crisis?

It's going to be something at the government level. Something that makes governments unable to intervene and create new money in order to bail out trouble spots in the private sector.

There's a few ways this could happen.

Bond markets. If investors stop buying a nation's sovereign debt, it could impede the ability of that government to create new money. But so far this isn't happening. Investors bought $2.4 trillion in American bonds this past fiscal year, more than paying the U.S. deficit.

It could be public outcry. If the people rally hard enough against profligate government spending, they might be able to handcuff their leaders. The US Tea Party movement is one sign of this happening, although it's unclear yet whether this group will have any material effects on government spending.

Maybe currencies will be the brake. Theoretically, the more a nation prints cash, the more the value of its money will fall. The loss of spending power should eventually force an end to money creation. Advance economies will keep weak currencies to boost exports...

Except that the world's largest economies are printing and devaluing in tandem – meaning that major currencies are staying roughly equal, relative to each other. Dollar, Pound, Yen and Euro

But here's a new one that just emerged yesterday: perhaps monetary tampering or monetary dumping would be halted by international peer pressure.

Such a move was suggested by World Bank president Robert Zoellick in a Financial Times article on 5th Nov. Among other things, Zoellick wrote that the global economy should move back to a gold standard. And that major nations should "agree to forego currency intervention, except in rare circumstances agreed to by others."

A gold standard would hamstring governments in printing new money. So would a system where monetary interventions need to be approved by a world vote. Bu the point is , do we have enough Gold supplies to meet the demand globally? Supplies are flat. Such a system would open the door for insolvent banks and corporations to once again fail in the good, old-fashioned way.

Could such a system come to pass? Currencies and global trade are already becoming a heated issue in many parts of the world. Just look at the renewed pressure on China to re-value the renminbi.

If things get rough enough, world leaders might be forced to sit down and negotiate something like Zoellick suggests. If you're wondering what's ahead for global finance, this is an area to keep watching for signs. Protectionism and structure devaluation of currencies would be the strategic interest of many advanced economies...

Friday, November 5, 2010

QE2 wont boost the economy--By Shan Saeed

Fed's Plan is an illusion....Its risky.......By Shan Saeed

The cat is out, Ben Benanke announced massive $600 billion bond purchase to kick-start the economy. But will it work? I doubt and its a risky path. Its an illusion. The U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery.

The Fed announced Wednesday that it would purchase $600 billion in Treasury, aiming to lower long-term interest rates in an effort to spur spending, increase asset price and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds. QE1 did not work to boost the economy....If US compares itself with German, they are doing much better...USA borrowed 6% of GDP for the stimulus injection in the economy. The German's borrowed 1.5% of GDP for stimulus to revive the economy..Stimulus is working in Germany but the size is small. But not in USA.....The confidence level remains very low....

The Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."

The Fed's move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the U.S. will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets. Let me warn you that the U.S. won't find its way out of the economic doldrums through over-stimulation.

"The thought that you can create a prosperous economy by inflating is an illusion, in my judgment. And we should never forget that. I thought what the lesson I learnt at Uni. of Chicago, Booth School of Business should spread and be shared with others. Printing money does not fix the economy..Its a tactical maneuvering to provide breathing space to the economy....Fiscal and Monetary policies work in tandem not alone....

The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus.

Fed Game plan looks very simple. The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up, lower yields and interest rates down. But if people get concerned about longer run inflationary impacts, the effects go in the other direction."

In theory, the Fed's action is expected to lower interest rates because bond prices and interest rates - also known as yields - move in opposite directions. The yield is the fixed amount of annual interest paid to the owner of the bond expressed as a percentage of the bond price, so the extra demand created by the Fed's purchases should push bond prices up and lower the yield. But when investors fear inflation will be higher in the future they demand that bonds pay a higher interest rate to protect their investment from the value-eroding effects of inflation.


Aftershock's predictions for the future are not positive for US economy. The picture is very disturbing. Please hold your breadth.

— A nearly unfathomable level of unemployment.
— An already bad real estate market gets drastically worse
— A historic drop in the stock market
— An attack of hyperinflation
— The collapse of the dollar and possible rise of a one-world currency
— Simple goods become unaffordable

Disclaimer: This is just a research piece and not an investment advice. Please use your own due diligence / judgment call for investment strategy or decision

Friday, October 29, 2010

Food supply will remain short----Crisis coming up----By Shan Saeed

5 Dangers To Global Crops That Could Dramatically Reduce The World Food Supply-----By Shan Saeed

The world food situation is starting to get very, very tight. Unprecedented heat and wildfires this summer in Russia and horrific flooding in Pakistan and China have been some of the primary reasons for the rapidly rising food prices we are now seeing around the globe. In places such as Australia and the African nation of Guinea-Bissau, the big problem for crops has been locusts. In a world that already does not grow enough food for everyone (thanks to the greed of the elite), any disruption in food production can cause a major, major problem. Tonight, thousands of people around the world will starve to death. So what happens if things get even worse? Many agricultural scientists are now warning that global food production is facing dangers that are absolutely unprecedented. Crop diseases such as UG99 wheat rust and the "unintended effects" of genetic modification pose challenges that previous generations simply did not have to face. The outbreak of a real, live global famine looks increasingly possible with each passing year. So are you and your family prepared if a global famine does strike?

Already, there are huge warning signs on the horizon. Just check out what agricultural commodities have been doing. They have been absolutely soaring.

A recent article on the Forbes website noted a few of the agricultural commodities that have skyrocketed during this year....

Here’s what’s happened to some key farm commodities so far in 2010…

•Corn: Up 63% Cotton 53%
•Wheat: Up 84%
•Soybeans: Up 24%
•Sugar: Up 55%

Are you ready to pay 84 percent more for a loaf of bread? So what is going to happen if the world food situation gets even tighter?

Don't think that it can't happen.

The following are 5 potential dangers to global crops that could dramatically reduce the world food supply....

UG99 Wheat Rust

UG99 is commonly known as "wheat rust" or "stem rust" because it produces reddish-brown flakes on wheat stalks. The International Maize and Wheat Improvement Center in Mexico believes that approximately 19 percent of the global wheat crop is in imminent danger of being infected with UG99.

Ultimately, it is estimated that about 80 percent of the wheat on the globe is capable of catching the disease.

There is no known cure.

This current strain of wheat rust was discovered in Uganda in 1999 and has spread into areas of Kenya, Sudan, Ethiopia, Yemen and Iran. It is feared that this crippling disease will spread even farther into south Asia, devastating the fertile growing regions of Afghanistan, Pakistan, India and Bangladesh.

If that happens, you might as well kiss world food stability goodbye.

A recent article in the Financial Times contained an absolutely stunning quote from one prominent agricultural scientist....

“You can talk about crying wolf,” says Ronnie Coffman, director of the Durable Rust Resistance in Wheat project at the University of Cornell in the US, “but it is a wolf”, he asserts, driving across the corn fields of Kansas.

Later on in the same article, Coffman warns that this disease could cause a devastating famine in which literally millions of people would die....

“It can be absolutely devastating if environmental conditions are right,“ he says. “You can count the number of people who could die from this in the millions.”

Mad Soy Disease

Mad Soy disease is spreading at an alarming rate among soy farms down in Brazil. Previously the disease had been confined to the north part of the country, but now it has been increasingly spreading south. This disease retards the maturation of infected plants, and it has been causing yield losses of up to 40 percent. The USDA says that "there are no known effective treatments."

Verticillium Wilt

Verticillium Wilt is a fungus that prevents lettuce from absorbing water, causing it to quickly grow yellow and eventually wilt. This dangerous fungus is very hard to get rid of totally because it can stay in the soil for up to seven years.

Today, Verticillium Wilt is spreading all over Monterey County, California. Considering the fact that Monterey County produces more than 60 percent of the lettuce in the United States, that is very bad news.

Late Blight

In 2009, a disease known as "late blight" attacked potato and tomato plants in the United States with a ferocity never seen before. According to a press release from Cornell University, late blight had "never occurred this early and this widespread in the U.S." when it started showing up all over the place early last year.

Late blight begins as ugly brown spots on the stems of potato and tomato plants, and as the spots increase in size, white fungal growth develops until finally a soft rot completely collapses the stem.

This was the disease that was responsible for the Irish potato famine in the 1850s. A major new outbreak could occur without warning.

Genetic Modification

While it may or may not technically be a disease (depending on how you look at it), genetic modification is having a very serious affect on crops around the globe.

For example, about 10 years ago Chinese farmers began to widely adopt Monsanto's genetically modified Bt cotton. Well, researchers have found that since that time, mirid bugs that are resistant to the Bt pesticide have experienced a complete and total population boom.

Today, six provinces in Northern China are experiencing what can only be described as a "mirid bug plague". Mirid bugs eat more than 200 different kinds of fruit, vegetables and grains. Chinese farmers in the region are completely frustrated.

In the United States, a different problem is developing. The complete and total reliance of so many U.S. farmers on Monsanto’s Roundup herbicide has resulted in several varieties of glyphosate-resistant "superweeds" developing in many areas of the United States.

The most feared of these "superweeds", Pigweed, can grow to be seven feet tall and it can literally wreck a combine. Pigweed has been known to produce up to 10,000 seeds at a time, it is resistant to drought, and it has very diverse genetics.

Superweeds were first spotted in Georgia in 2004, and since then they have spread to South Carolina, North Carolina, Arkansas, Tennessee, Kentucky and Missouri.

In some areas, superweeds have become so bad that literally tens of thousands of acres of U.S. farmland have actually been abandoned.

But that is what we get for trying to "play God".

We think that we can just do whatever we want with nature and there will not be any consequences.

One of the most frightening things about genetic modification is that it actually reduces that amount of crop diversity in the world.

For example, if nearly all farmers start using the same "brand" of genetically modified plants that are all virtually identical, it sets up a situation where crop diseases and crop failures can cascade across the planet very easily.

Genetic variety is a very desirable thing, but today our scientists are just doing pretty much whatever they want without really considering the consequences.

It has been said many times that genetic engineering is similar to "performing heart surgery with a shovel".

The truth is that we just do not know enough about how our ecosystems work to be messing around with them so dramatically.

Perhaps even more frightening is that once these genetically engineered monstrosities have been released into our environment, it is absolutely impossible to recall them. They essentially become a permanent part of our ecosystem.

But can we afford to make any serious mistakes at this point?

The truth is that we already live in a world that is not able to feed itself.

Tonight, approximately 1 billion people across the globe will go to bed hungry. Every 3.6 seconds someone in the world starves to death, and three-fourths of those who starve to death are children under the age of five.

It is currently being projected that global demand for food will more than double over the next 50 years.

So what is going to happen if we start seeing widespread crop failures in the coming years? The global food supply is not nearly as stable as most people believe. At some point, it is going to be tested severely. Simple caveat.. Prepare yourself.

Monday, October 25, 2010

Faster productivity growth is required in the rich economies--Shared by Shan Saeed

From ECONOMIST Magazine

PRODUCTIVITY growth is the closest economics gets to a magic elixir, especially for ageing advanced economies. When workers produce more for every hour they toil, living standards rise and governments have more resources to service their debts and support those who cannot work. As the rich world emerges from the financial crisis, faster productivity growth could counteract the drag from adverse demography. But slower productivity growth could make matters worse.

Workers’ productivity depends on their skills, the amount of capital invested in helping them to do their jobs and the pace of “innovation”—the process of generating ideas that lead to new products and more efficient business practices. Financial crises and deep recessions can affect these variables in several ways. As this special report has argued, workers’ skills may erode if long-term unemployment rises. The disruption to the financial sector and the reluctance of businesses to invest in the face of uncertain demand may also reduce the rate of capital formation, delaying the factory upgrades and IT purchases that would boost workers’ efficiency.

Financial crises can affect the pace of innovation, too, though it is hard to predict which way. Deep recessions can slow it down as firms slash their spending on research and development. But they can also boost the pace of efficiency gains as weak demand forces firms to rethink their products and cost structures and the weakest companies are winnowed out. According to Alexander Field of Santa Clara University, the 1930s saw the fastest efficiency improvements in America’s history amid large-scale restructuring.
Almost every government in the rich world has a spanking new “innovation strategy”. Industrial policy—out of fashion since its most credible champion, Japan, lost its way in the 1990s—is staging a comeback. But mostly such policies end up subsidising well-connected industries and products. “Green technology” is a favourite receptacle for such subsidies.

In 2008 France created a sovereign-wealth fund as part of its response to the financial crisis; it promises to promote biotechnology ventures, though it has also sunk capital into conventional manufacturers that happened to need money. In 2009 Britain followed suit with a “strategic investment fund”. The Japanese too are back in the game. In June the newly invigorated Ministry of Economy, Trade and Industry (METI) unveiled a plan to promote five strategic sectors, ranging from environmental products to robotics. However, past experiments with industrial policy, from France’s Minitel, an attempt to create a government-run national communications network, to Spain’s expensive subsidies to jump-start solar power, suggest that governments are not much good at picking promising sectors or products.

More important, the politicians’ current focus on fostering productivity growth via exciting high-tech breakthroughs misses a big part of what really drives innovation: the diffusion of better business processes and management methods. This sort of innovation is generally the result of competitive pressure. The best thing that governments can do to foster new ideas is to get out of the way. This is especially true in the most regulated and least competitive parts of the economy, notably services.

To see why competition matters so much, consider the recent history of productivity in the rich world. On the eve of the recession the rate of growth in workers’ output per hour was slowing. So, too, was the pace of improvement in “total factor productivity” (a measure of the overall efficiency with which capital and workers are used which is economists’ best gauge of the speed of innovation). But that broad trend masks considerable differences.

Over the past 15 years America’s underlying productivity growth—adjusted for the ups and downs of the business cycle—has outperformed most other rich economies’ by a wide margin (see chart 12). Workers’ output per hour soared in the late 1990s, thanks largely to investment in computers and software. At first this advance was powered by productivity gains within the technology sector. From 2000 onwards efficiency gains spread through the wider economy, especially in services such as retailing and wholesaling, helped by the deregulated and competitive nature of America’s economy. The improvements were extraordinary, though they slowed after the middle of the decade.

The recent history of productivity in Europe is almost the mirror image of America’s. Up to the mid-1990s the continent’s output per hour grew faster than America’s , helped by imports of tried and tested ideas from across the water. Thanks to this process of catch-up, by 1995 Europe’s output per hour reached over 90% of the American level. But then Europe slowed, and by 2008 the figure was back down to 83%. This partly reflected Europe’s labour-market reforms, which brought more low-skilled workers into the workforce. That seemed a price well worth paying for higher employment. But the main reason for Europe’s disappointing productivity performance was that it failed to squeeze productivity gains from its service sector.

A forthcoming history of European growth by Marcel Timmer and Robert Inklaar of the University of Groningen, Mary O’Mahony of Birmingham University and Bart Van Ark of the Conference Board, a business-research organisation, carefully dissects the statistics for individual countries and industries and finds considerable variation within Europe. Finland and Sweden improved their productivity growth whereas Italy and Spain were particularly sluggish. Europe also did better in some sectors than in others; for example, telecommunications was a bright spot. But overall, compared with America, European firms invested relatively little in services and innovative business practices. A new McKinsey study suggests that around two-thirds of the differential in productivity growth between America and Europe between 1995 and 2005 can be explained by the gap in “local services”, such as retail and wholesale services.

Europe’s service markets are smaller than America’s, fragmented along national lines and heavily regulated. The OECD has tracked regulation of product and services markets across countries since 1998. It measures the degree of state control, barriers to competition and obstacles to starting a new company, assigning a score to each market of between 0 and 6 (where 0 is the least restrictive). Overall the absolute level of product regulation fell between 1998 and 2008, and the variation between countries lessened. America and Britain score joint best, with 0.84. The EU average is 1.4. But when it comes to services, the variation is larger and Europe has made much less progress.

In professional services, the OECD’s score for Europe is fully twice as high as for America (meaning it is twice as restrictive). As the McKinsey report notes, many European countries are rife with anti-competitive rules. Architects’ and lawyers’ fees in Italy and Germany are subject to price floors and ceilings. Notaries in France, Spain and Greece and pharmacies in Greece are banned from advertising their services. Such restrictions limit the ability of efficient newcomers to compete for market share, cosseting incumbents and raising costs across the economy.

In Japan productivity growth slumped after the country’s asset bubble burst at the start of the 1990s. One reason, as an earlier section of this report has described, was the failure to deal decisively with the bad loans clogging its banks, which propped up inefficient “zombie” companies rather than forcing them into liquidation. That meant less capital was available to lend to upstart firms. Another problem was the lack of competition. Japan’s service sector, unlike its world-class manufacturers, is fragmented, protected from foreign competition and heavily regulated, so it failed to capture the gains of the IT revolution.

Over the years Japan made various efforts at regulatory reform, from freeing up the energy market and mobile telephony in the mid-1990s to liberalising the financial sector in the late 1990s. These have borne some fruit. Japan’s total factor productivity growth, unlike Europe’s, began to improve after 2000. But coupled with the continuing weakness of investment, the reforms were too modest to bring about a decisive change in the country’s overall productivity prospects.

Learn Swedish

Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector. A recent study by the Bank of France and the OECD looked at 20 sectors in 15 OECD countries between 1984 and 2007. It found that reducing regulation on “upstream” services would have a marked effect not just on productivity in those sectors but also on other parts of the economy. The logic is simple: more efficient lawyers, distributors or banks enable firms across the economy to become more productive. The size of the potential gains calculated by the Bank of France is stunning. Getting rid of all price, market-entry and other competition-restricting regulations would boost annual total factor productivity growth by one percentage point in a typical country in their sample, enough to more than double its pace.

Getting rid of all anti-competitive regulation may be impossible, but even the more modest goal of embracing “best practice” would yield large benefits. The IMF has calculated that if countries could reduce regulation to the average of the least restrictive three OECD countries, annual productivity growth would rise by some 0.2 percentage points in America, 0.3 percentage points in the euro area and 0.6 percentage points in Japan. The larger gains for Europe and Japan reflect the amount of deregulation left to be done. In both cases the productivity gains to be achieved from moving to best practice would all but counter the drag on growth from unfavourable demography.

Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance. So far the damage may be limited. Many of Mr Obama’s regulatory changes, from tougher fuel-efficiency requirements to curbs on deep-water drilling, were meant to benefit consumers and the environment, not to curb competition and protect incumbents. Some of the White House’s ideas, such as the overhaul of broadband internet access, would in fact increase competition. The biggest risk lies in finance, where America’s new rules could easily hold back innovation.

An unlikely role model

The country that is grasping the challenge of deregulation most energetically is Greece, whose debt crisis has earned it a reputation for macroeconomic mismanagement. Under pressure from the IMF and its European partners, the Greek government has embarked on one of the most radical reforms in modern history to boost its productive potential.

Again, this involves freeing up an historically cushioned service sector. So far the main battleground has been trucking. Before Greece descended into crisis, its lorry drivers required special licences, and none had been granted for several decades. So a licence changed hands in the secondary market for about €300,000, driving up the costs of everything that travelled by road in Greece. But under a reform recently passed by the Greek government, the number of licences is due to double. Greek lorry drivers went on strike in protest, but the government did not budge. Lawyers and pharmacists too are slated for deregulation.

If Greece can stick to its plans, it will, like Sweden, show that crises can offer valuable opportunities. Without the country’s brush with default and the conditions attached to the resulting bail-out, its leaders would have been unlikely to muster the necessary political will.

The sluggish progress of reform elsewhere underlines this point. Germany, which ranks 25th out of 30 OECD countries on the complications of its licence and permit system, approaches deregulation on tiptoes: it recently reduced restrictions on price-setting by architects and allowed chimney-sweeps easier market access.

Two French economists, Jacques Delpla and Charles Wyplosz, have argued that incumbent service providers should be paid off in exchange for accepting competition. They reckon that compensating French taxi drivers for deregulation would cost €4.5 billion. But buying off the losers from reforms may not hold much appeal.

Boosting European integration could be another way to cut through national resistance to deregulation. As Mario Monti, a former EU competition commissioner, pointed out in a recent call for action, 70% of the EU’s GDP is in services but only 20% of those services cross borders. The EU’s Services Directive, which is supposed to boost cross-country competition in services, has proved fairly toothless.

How governments can help

Activism on the part of governments is not always misguided. Their investment in basic research is important. The grants doled out by America’s National Institutes of Health, for example, generate the raw ideas that pharmaceutical firms turn into profitable medicines. America’s Defence Department created the beginnings of the internet. Public spending on building and maintaining infrastructure also matters, though economists argue about how much. Governments can encourage private R&D spending with tax credits and subsidies, and the evidence suggests that more R&D spending overall boosts growth. Other research shows that firms which spend more on R&D are also often quicker to adopt other innovations.

But these traditional ways of encouraging innovation may be less relevant now that research has become more global and more concentrated on software than on hardware. Since the mid-1990s China alone has accounted for a third of the increase in global spending on research and development. Big firms maintain research facilities in many countries. Dreaming up new products and services, as well as better ways of producing old ones, increasingly involves collaboration across borders and companies. As Mr Jorgenson of Harvard University puts it: “Think Google, not lab coats.”

In this more fluid world the old kind of government incentives, such as tax credits and subsidies, may do less to boost innovation than more imaginative inducements, such as offering firms prizes for breakthrough innovations. Bigger efforts to remove remaining barriers to collaboration, from limitations on high-skilled immigration to excessively rigid land-use rules, should also help.

A smart innovation agenda, in short, would be quite different from the one that most rich governments seem to favour. It would be more about freeing markets and less about picking winners; more about creating the right conditions for bright ideas to emerge and less about promises of things like green jobs. But pursuing that kind of policy requires courage and vision—and most of the rich economies are not displaying enough of either.