Friday, July 23, 2010

Global Economy in crisis again

Global economy will be in crisis again.Get ready for the new financial turmoil…..

By Shan Saeed----Economist
Uni of Chicago Graduated

Financial markets will remain volatile for the next 2-years. People, investors and my clients are curious to know what the main reason for this new financial mess.
The main driver to the economy is confidence, which is lacking right now….American consumers are not spending infact they have started to save more…..The danger of deflation is more serious than inflation....Health care bill is a form of tax. I have been sharing this with all my valued clients. I dont rule out the possibility of double dip recession hitting US very soon. U.S. Consumer Credit has declined by $167Bn in the last 19 months. Consumer spending comprises 70% of U.S. GDP. The recovery figures are questionable. It will take 4/5 years for US to recover from the current financial mess. Housing slump atleast 10% will drag the economy further down.The world largest economy is in worse situation than 1930s' the hstory repeating itself?

Global Bank Crisis

Global banks face $4.7 trillion credit squeeze and another crisis is around the corner...Banks across the globe had to raise trillions of dollars in capital as a result of the financial crisis and now the bill for that borrowing is coming due.

It’s not a pretty picture. Banks must repay or roll over $4.7 trillion of debt to bondholders and other creditors through 2012, according to the Bank for International Settlements. Its huge. Its just like a train coming at you and you are not going to stop it by standing in its way!!!!

No one seems to be talking about it that much. However, it’s of first-order importance for lending and output. Of the $4.7 trillion total, European banks owe $2.7 trillion, and U.S. banks $2.0 trillion.

The situation is more precarious in Europe, not only because of the larger number, but also because the sovereign debt crisis is hitting Europe harder than the United States.

Banks that need to roll over their loans and bonds will be competing with their own governments, which also have huge borrowing needs. That could cause a widespread credit crunch, making it even more difficult for consumers and businesses to borrow. European banks may face an added burden, as the stress tests they’re now undergoing could force them to raise still more capital.

Central Banks

Central bank globally are creating another asset bubble by keeping low interest rates…..There are several dangers from low-interest rates…This includes lopsided balance sheets, misallocation of capital and workers resulting in distortion, excessive risk taking and destabilizing surges in the capital flows in the financial markets. They will continue with Quantitative easing policy, zero interest rates, and buying of government debt will remain on cards for very long……Keeping low interest rates with weak fiscal support will continue as natural policy mix moving forward.

US economy is in real mess…its running a deficit of $14 trillion this year and might touch $20 trillion by 2014….Is this the end of the powerful country..Its quite premature to say at this point of time….We might witness dollar consolidation in this phase as Euro is structural flawed since its beginning. But it is possible that US Dollar can get weaker in the near future and thus leading into currency crisis. Currency crisis are always painful for any economy. Look at euro , it was trading at 1.51 in November 2009 and hit 1.19 in June this year in 2010….It lost more than 19% of its value in 7 months……Depressing !!!!Euro might touch parity next year in March -2011…..UK will remain the sick child of Europe for the next 5 years……Europe’s outlook remain uncertain with PIGS financial austerity plans……It won’t work in the long run….

Strategies for investing in Stable Currencies
Investors are looking for stable currencies with bullish outlook..In my humble opinion, Canadian dollar, Aussie dollar, Swiss franc and Chinese Yuan will navigate through these currency crisis and uncertain financial markets with great ease………….

Real Assets
Investors are looking for real assets in times of uncertainty, chaos, risk and unpredictable behavior of the government…The name is Gold and Silver, which are the real assets as we navigate through turbulent times ahead. What are central banks doing globally? .Read this on……Central banks are using their gold supply as collateral to borrow money from each other since they don’t trust other banks balance sheets…it is so risky now!!!!!According to Wall Street Journal, they are technically engaging in swaps with the BIS. The banks give the BIS gold in exchange for cash and agree to buy back the gold at a later date….This is called repo and reverse repo..Securities pledges are not sufficient anymore since they have lost confidence among major players…..
The banks borrowed a record $14 billion in the first three months of this year from the BIS, giving it 349 metric tons of gold in return, according to the latest BIS data I have gathered.
And figures indicate the banks swapped another 33 tons of gold in April 2010. Central banks are eager to buttress their cash supply because of the spreading sovereign debt crisis. Liquidity tightened in the financial system as Europe’s debt woes unfolded. Central bank moves call into question gold’s status as a safe haven investment. Originally sovereign financial troubles were taken as unambiguously bullish for gold.
But some are now rethinking this if the gold that sovereigns hold has been pledged as collateral to someone else who has more ability to liquidate those holdings.
Gold will maintain its upsurge because of the following reasons
1. Developed countries will continue to debase their currencies including dollar and euro
2. Interest rates will stay at near zero till 2011….as Ben Bernanke said..Extended Period
3. Central banks will follow the monetary accommodating policy by using a new drug called quantitative easing tool..Printing more and more money …..
4. Financial markets will run into lot of uncertainty and risky behavior
5. Recovery figures are all questionable and fudged
6. We might see inflation as printing money will lead us to that zone very soon.
7. Market is lacking confidence and investors are shaky…

• Gold prices in the next 3- years
Prices of Gold from 2001 to 2008
Year Price per Ounce
2001 $257
2005 $512
2006 $632
2007 $833
2008 $869
2009 $1096
Next 3-years
2010 $ 1300/ ounce
2011 $ 1400/ ounce
2012 $ 1500/ ounce
Something you haven’t seen in the press much is that, the more fixing the government does, the worst the ultimate result will be. The size of the bailout so far is absolutely unprecedented in all of history. Last November, I did some math and found bailout spending at that time was equal to the inflation-adjusted cost of the Marshall Plan, Louisiana Purchase, Race to the Moon, S&L Crisis, Korean War, New Deal, Iraq Invasion, Vietnam, and NASA—combined. Only World War II rivaled the bailout. And that was back in November-2008.
All that spending originates as borrowing, and there’s no way it’ll ever be repaid. It’ll be inflated away by Federal Reserve’s monopoly on money creation. That will erode the value of the money in your pocket, in your bank account, and, yes, in your stock portfolio, too. That’s why gold is pushing $1,250 per ounce.
We have analyzed about Gold movement in the past 10-years. We foresee Gold could reach $1,300 a troy ounce over the next 12 months. We would recommend that investors stay overweight in Gold, Gold ETF and Gold equities.
At this point of time, the most important driver of the gold price is the ZERO real Fed Funds rate in the USA. The rates will continue to remain zero for the next 14-months till Q-3, 2011. Inflation adjusted rate stays below 2%, and then gold price will rise further to $1,500 per ounce in 2-years period.
Gold is an under-strength asset with just 0.9% of global Assets Under Management held as gold or Exchange Traded Funds or gold equities in private banks, institutions and private investors globally while the inflation adjusted gold price is still 41% below its previous high touching in March-2008.
Chin and Japan together control 42% of global foreign exchange reserves but hold only 1.97% of their reserves as gold as per the latest information. The Bank of Japan and Bank of China want to hold 10% of their reserves in gold (compared with 70% in Europe and 80% in the US). They need to purchase around $250 billion worth of gold, more than double the world’s annual gold production to catch up with Europe and US figures going forward. Don’t write off Russia as well. They are in the main race of the Gold run.
Did you know the President confiscated all the gold of American citizens in 1933??
Its true……all in one quick swoop of the pen: DECREE ISSUED
Issued April 5, 1933
All persons are required to deliver
now owned by them to a Federal Reserve Bank, branch, or agency, or
to any member bank of the Federal Reserve System.
REMEMBER: Note to investors and my valued clients….Think strategically…….
It was at the height of the Great Depression in 1930s. And the US government desperately needed to shore up its financial position. So in a dramatic move, it took everyone’s gold. We have to reach down to the bottom to make sure that you understand the import of GOLD’s HISTORY. GOLD IS REAL CURRENCY AND IMPORTANT ASSET CLASS INVESTMENT. GOLD IS HEDGE AGAINST CHAOS AND UNPREDICATABLE BEHAVIOUR OF THE GOVERNMENTS.

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