Sunday, August 29, 2010


Is the U.S. the Next Bear Stearn's?----Shared By Shan Saeed

The U.S. government is handling its finances just like Bear Stearn's, paying for long-term liabilities with short-term funding. The difference is that the government prints its own currency. But the private sector has shown that’s not a very good way of running a railroad.

About 67% of the Treasury’s debt matures within 3-years. That begs the question of why the government isn’t issuing debt as long-term as it can. After all, some companies are looking at issuing 100-year bonds to lock in these low interest rates.
I see two possible explanations.

First, you want the deficit to look as low as possible now, so you keep your interest expenses low.

The second reason is more frightening. Marginal buyers of debt, in particular the Chinese, have shown they don’t want to lend long-term. They want the leverage that comes with having Uncle Sam go back to them every week or two.

That means the deficit could represent a national security issue. I don’t want to be overly conspiratorial, but certainly you’re conceding some sovereignty when you fund yourself this way. To be sure, there are signals that the Obama administration is shifting to longer-term debt. But the magnitude of the debt is so large that you’ve only just begun. As we issue debt in our own currency, we can get away with issuing so much short-term debt. I don’t think it’s a prudent or savant or sustainable approach in the long run....US dollar will be under pressure next year and might lead to currency crisis.....

Indeed part of the reason why gold is going up while Treasury yields are plunging is that people are trying to hedge inflation and deflation at the same time. Investors have little faith or confidence in the US economy..This gives you some concern about paper currencies generally.

As we look at the economy from granular view, It reflects that negative sentiments have cropped in. Analyze the equity market, S&P 500, Dow Jones....and corporate balance sheets earning for large multinationals are quite questionable.

However, there are lot of corporates that are down with historically low valuation and its good time to buy them. You can buy world beating companies at 10 or 11 times earnings. If you marry that with a fundamental belief in our system of government, which will eventually throw the bums out, there’s a lot of relative value in the stock market. Not everyone is so optimistic about stocks.

People are focused on the headwinds more than the tailwinds. Meaning that investors are more worried by weak economic data than encouraged by strong corporate profits.

Disclaimer: Please rely and research your own data..This information piece does not guarantee future earning or success for your investment strategy

Saturday, August 28, 2010

USA is BANKRUPT-----Read IMF report-----Shared by Shan Saeed

FIRST, some background. The US is bankrupt.
If the Fed's going to monetise debt, now's the time to do it
Laurence Kotlikoff from economist magazine

Don't take my word for it. Take the IMF's.

In its recent review of the US economy, the IMF said, "The US fiscal gap is huge for plausible discount rates." And, "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of US GDP." (See section 6 here.)

The fiscal gap is the value today (the present value) of the different between projected spending (including serving official debt) and projected revenue in all future years.

To put 14% of U.S. GDP in perspective, total revenues currently constitute only 14.9% of GDP.

The Congressional Budget Office's Long-Term Alternative (i.e., honest) Fiscal Scenario projection shows, if anything, an even greater degree of insolvency. Using the CBO's spreadsheet, I measure the fiscal gap at $202 trillion.

Congress may cut some spending and raise some taxes, but it's not going to come up with anything close to 14% of GDP on an annual basis without radically reforming and simplifying our tax, retirement, healthcare, and financial systems, each of which is an incredibly complex and hugely inefficient mess. Congressman Paul Ryan's Roadmap offers such radical, simplifying, growth-promoting, and physiologically-inspiring reforms.

If Uncle Sam doesn't come up with a KISS (keep it simple, stupid) plan like Ryan's or mine (see my recent book, "Jimmy Stewart Is Dead", including the Afterword), which entails ironclad control on growth in federal spending, Uncle Sam will be forced to make money the third-world way—by printing it.

Let's consider this most likely scenario. I.e., let's consider the fact that Uncle Sam has a time-path of expenditures net of taxes, which he can only "finance" by printing money. I put the word finance in quotes because printing money is simply a way of imposing a hidden and subtle tax, which economists call seignorage.

In printing money and spending it, the government meets its obligations. But the extra money leads prices to rise by more than would otherwise occur. This reduces the purchasing power of the money and of the government bonds people already hold. And this loss of purchasing power of existing money balances and the decline in the real value of government debt represents the seignorage tax.

So monetary policy is a form of fiscal policy, and we have to think about the Fed's actions from the perspective of fiscal policy. If we take it as given that Uncle Sam will print money to "cover" his bills, the only question is when. He can print money today to pay off future bills or he can wait until the future to do so. Printing money today to buy long-term Treasury bonds is an example of the former. Sam can also print money today to buy assets that will generate income over time. The return on those assets can then be used to pay future bills.

For example, the Fed could print $9 trillion this morning and buy back all outstanding Treasury bills and bonds. (Note, the Fed would need to print more money if the price of these securities rose as it was buying them up.) This afternoon, it could print, say, $25 trillion and buy up half the world's stocks. These two acts would make a big improvement in Uncle Sam's finances.

But the prices of goods and services would skyrocket and the dollar would lose all of its value. Worse, everyone would see they'd been taken and that they should never have held dollars or anything denominated in dollars. Overnight people would make the yuan, the Canadian dollar, or some other more trustworthy money the reserve currency.

So as much as Uncle Sam would like to print $9 trillion this morning and $25 trillion this afternoon and shave $34 trillion off his $202 trillion fiscal gap, he's not likely to do so for fear of exposing his racket.

Instead, Uncle Sam, actually, Uncle Ben (as in Ben Bernanke), has decided to print money to buy back US bonds and to buy private assets, but on a smaller scale. We heard this week of the Fed's plans to further expand its "balance" sheet and purchase longer term US Treasury bonds. The Fed also will, it appears, continue to indirectly purchase private assets, primarily in the form of mortgage-backed securities issued by Fannie Mae and Freddie Mac.

This makes sense. When prices are stable or falling, the ability of the public to see through to what's really going on is that much less. Indeed, exacting the seniorage tax is easiest when prices are falling because the public doesn't realise that had the central bank not printed so much money, prices would have fallen even further and they would have enjoyed a bigger increase in the purchasing power of their money and government bonds. I.e., when prices are falling and the government prints money, it effectively taxes holders of money and government bonds by limiting their real capital gains on these holdings.

Yes, this is very subtle, but that's what's going on.

So, to get back to the question of what monetary policy the Fed should be running right now, my answer is that if the Fed is ultimately going to need to print money to pay the government's bills, this is the time to do it or, at least more of it. The danger, though, is that when the economy returns to normal, there will be so much money sloshing around that prices will rise dramatically.

The Fed is very worried about this outcome having printed $1.152 trillion since August 2007 and jacked up the monetary base by a factor of 2.4. Indeed, the Fed is so worried about this extra money getting into the economy's bloodstream that it's been bribing banks to horde this money as excess reserves. The bribe is coming in the form of paying interest on the excess reserves. This bribe has also been used to pass money under the table to the banks so they could "earn" money in a completely safe manner and, thereby, remain solvent.

In worrying about inflation and in keeping the banks afloat via payment of interest on excess reserves, the Fed has undermined its other objective, namely getting the banks to make more loans to the private sector. I think it's time to focus on that objective. Hence, I'd also recommend that the Fed stop paying interest on deposits and take the risk on inflation. Jobs, at this point, are more important than prices.

Wednesday, August 18, 2010

US Bond market is in trouble as economy struggles to bounce back----by Shan Saeed


American economy is in softening mode and will take 3/4 years to get out of this long recession..I think we should call it a depression of a new era. According to
Economist Jeremy Siegel and Wisdom Tree research director Jeremy Schwartz say there's a bubble brewing in the bond market that will cost investors dearly.

Just as investors were too enthusiastic (in 2000) about the growth prospects in the economy, many investors today are far too pessimistic," Its in The Wall Street Journal. Further more, If 10-year interest rates, which are now 2.8 percent, rise to 4 percent as they did last spring, bondholders will suffer a capital loss more than three times the current yield,

The eminent economist pair noted that the rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1 percent, leaving this bond selling at more than 100 times its projected payout.

“The last time interest rates on Treasury bonds were as low as they are today was in 1955,” Siegel and Schwartz say. “The subsequent 10-year annual return to bonds was 1.9 percent, or just slightly above inflation, and the 30-year annual return was 4.6 percent per year, less than the rate of inflation.”

Siegel and Schwartz believe dividend-paying stocks are the safest bet for investors looking for income and inflation protection. Investors should choose technology stocks like Apple, IBM, Google, Baidu: Telecom Stocks like Vodafone, BT, Research in Motion, Stocks for life, Walmart, P&G, Johnson and Johnson, Coke, Pepsi, Nestle, Energy stocks should be considered as safe investment

Investors should buy real assets like COGS i.e. Gold, Silver, Copper, Oil, Natural Gas, Agriculture stocks like wheat, rice, sugar, coffee and corn

Currencies buying opportunities include, Canadian Dollar, Aussie, Swiss Franc, Chinese Yuan, Japanese yen, Korean Won and Swedish Krone

Interest in dividend-oriented ETFs has increased as many investors position for tough times by moving into high-quality companies with solid dividend histories.

Thursday, August 12, 2010

The gentleman who taught me about Commodities Market ----Jim Rogers


JR=Jim Rogers Interview Transcript

Posted by Matt Hawes on 08/06/10 6:12 PM
Last updated 08/06/10 6:15 PM

[Newer: C4L Interviews Jim Rogers] [Older: Who poses the real threat to the Internet?]

C4L: We have the financial reform bill that recently passed through Congress. They're instituting a new Consumer Protection Bureau within the Federal Reserve, imposing more stringent regulation requirements on large financial firms, and creating a council to identify systemic risk. Will this sort of reform be effective in preventing future financial crises, and what do you think will be the effect on US businesses?
JR: Well, it's part of the trend where the US for whatever reason, both consciously and unconsciously, is driving the business out of the US. There's a transition now from the US to Asia in the financial world and the economic world. The largest creditor nations in the world are now in Asia: China, Korea, Taiwan, Hong Kong, Japan, Singapore, you know who the largest debtor nations in the world are.
In the 1920s and 1930s, there was a move from the UK to the US, exacerbated by a financial crisis and by many mistakes by UK politicians. Well, the same is happening now. People didn't notice what was happening in the 20s and 30s; apparently people don't' notice it now, but 10 years ago, most of the large IPOs in the world were done in New York; now very few of them are. America's driving the business out in many, many ways, and that's going to continue. I don't particularly like saying it; I don't particularly like seeing it happen. I'm an American. I pay taxes in America like you do, so it's not good, but it's making America's situation worse, not better.
C4L: What is that other countries are doing to be more financially prudent than America?
JR: They're leaving the market alone. In America, the government and the central bank especially, have interfered with the market several times. Under Alan Greenspan, whenever things got difficult for somebody, they called up Greenspan and said, "Save me, save me, save me!" And the government interfered with the market. Bernanke did the same thing. Rather than letting the market do what the market's supposed to do, i.e. which is let bankrupts go bankrupt, clean out the system, start over, Greenspan stepped in and said, "No, no, no, we don't want the market to work. We want to determine who wins, who loses, and what's going to happen in the world." He bailed out the market when long-term capital management came; he bailed out after the dot-com. Every time something happened he came in, interfered with the market, and would not let the market do its fundamental work, which is to sort itself out. Unfortunately, we are all now paying the price. Bernanke is of the same yolk, he's been doing the same sorts of things. So you and I, and, well, the world, not just every American taxpayer, the world is paying the price for all of this.
C4L: Well, if you were the President of the United States today, do you think that there are any practical steps that you could take immediately to fix the economy, and what would they be?
JR: Oh, sure. I would abolish the Federal Reserve. I would cut taxes. I would cut spending in a draconian manner. A very draconian manner. The idea that you can solve a problem of too much debt and too much consumption, with more debt and more consumption, defies comprehension. I can't believe that grown-ups would say words like that out-loud. But that's what they seem to think - I don't know if they really believe it's going to work, but they just don't know what else to do, and you know they're all doing... for the next elections, so they're making things worse. There are plenty of ways to solve the problem. You let the people who go bankrupt go bankrupt. You let Fannie Mae and Freddie Mac go bankrupt, go out of business. You let AIG go out of business. You stop bailing everybody out. The Japanese tried it our way in the early 90s; they refused to let anybody go bankrupt, and they still talk about the 1990s as "the lost decade." Now they're talking about this decade as the second lost decade. Japanese stock market today is 75% below where it was in 1990. That is not a typo. It is down 75% in 20 years. Can you imagine if the New York Stock Exchange, or if the DOW Jones to use a better example, were at 4000? I don't think people would be very happy. Well, that's the equivalent of the situation in Japan right now. It didn't work in Japan; it's not going to work in the US. It's going to lead to more problems. People say, "Oh, our poor grandchildren! Look at all this debt!" No, no, no, it's not our poor grandchildren; it's us! This is a current problem! This is a problem, even our parents, if they're still alive, forget our grandchildren; our parents are going to be suffering, and our grandparents if they're still alive! This is a current disaster for all of us.
C4L: When you say disaster, what exactly do you mean? What do you think is the realistic result of the current trajectory? Would hyperinflation, for example, be a possibility?
JR: Well, yes, hyperinflation is always a possibility. Anything is possible. I've learned that in my life. Studying philosophy when I was in University, I do know that anything is possible. I doubt you will have hyperinflation anytime soon, in the US anyway. Of course, we might; we might if they continue the current policies. Bernanke has said recently that he will take more measures. Well, Bernanke doesn't know much about finance, he doesn't know much about economics, or currencies, or markets. I mean it's staggering to go back and read his statements. You realize the man knows nothing about what he's doing. All he knows is printing money. He has studied printing money his entire intellectual career, and now we've given him the printing presses. Well, when he says he's going to do more, all he can really do is print money. The US, I don't think, can quadruple or quintuple its debt again anytime soon. I mean, if Bernanke will print money, then soon the world's going to run out of trees at the rate he's going. That's what he'll try; it's not going to work. Eventually it will lead to more inflation; we have inflation now. It will get worse, and eventually if things continue, it will lead to hyperinflation. But you know, hyperinflation is not that easy to do. Well, it's very easy to do if you go nuts, but it takes awhile for things to deteriorate into hyperinflation.
C4L: Given the current situation, what would be general advice that you would give Americans in order to protect their financial assets?
JR: Well, throughout history, when people have printed money, it's led to debasing of currencies. And the way to protect yourself and even to make money has always been that you'll use real assets. Whether that's silver, or natural gas, or cotton, or rice. You know, there are many natural resources or real assets that people have used throughout history. I would urge people to learn about real assets. I would urge people to learn about foreign investing; many countries are certainly doing much better than the US. I would urge people to learn about having investment accounts outside the US, because many currencies and economies will do better than the US going forward, and it's a good form of diversification and insurance if nothing else.
C4L: Last but not least, the US dollar has been the world's reserve currency for some time. Do you think that will be sustainable? And also, has there been any kind of "exorbitant privilege" in the fact that it has been the reserve currency? Has it had an effect on the economic landscape?
JR: The world has had many reserve currencies throughout history, and that always changes as reserve currencies or the nations behind reserve currencies get into trouble. The Pound Sterling gave way to the US dollar. The US dollar is already giving way. As you know, more countries are worried about the dollar. More countries are starting to use other things to settle their debts. This is a process which is underway and will continue, there's no question. The US dollar is a terribly flawed currency. The US is not just the larger debtor nation in the world, it's the largest debtor nation in the history of the world. So, naturally, many people are starting to figure out, "well, what do we do?" I hope including you, and including all of your listeners, and all of your readers, because this is history. This is the way the world works, and it's working this way again, fortunately or unfortunately depending on how you look at it. As the Pound Sterling lost its prowess 60 or 70 years ago, some people made fortunes on the change; some people lost fortunes. The people who understood what was happening made fortunes; the people who didn't lost fortunes. I hope people figure this all out and take appropriate actions.
C4L: OK. Well, Jim, that's all the questions we have, so we really appreciate you taking some time out to talk to us.
JR: Thank you. Anytime. Great pleasure.
Note: Nothing expressed in this transcript should be considered as investment strategy or advice from SHAN SAEED.

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Friday, August 6, 2010


Federal Reserve could enact $1 trillion "rescue" as soon as next week.

Sources: Bloomberg:

A report U.S. companies hired fewer workers than forecast last month intensified a debate among economists over whether Federal Reserve policy makers will take an incremental step next week toward providing more stimulus.

U.S. central bankers said in June that more monetary stimulus "might become appropriate" if the economic outlook "were to worsen appreciably." Chairman Ben S. Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.

"I lean toward a result where the Fed talks about reinvesting mortgage-backed securities runoff at next week's meeting but decides to wait six weeks and see what the economic data bring," said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. "The economic recovery downshifted in May but activity is absolutely not hurtling toward a double dip."

Government figures showed today that private payrolls increased by 71,000 jobs last month, less than the 90,000 economists had forecast. While the data may not alone force the Fed's hand, other indicators including a slump in housing point to a slowing recovery and greater odds policy makers will move toward more easing at an Aug. 10 meeting, some economists said.

Retailers in the U.S. reported July sales gains that missed analysts' estimates as consumers reduced spending before the back-to-school season. A manufacturing gauge tracked by the Institute for Supply Management fell, while a similar index tracking service industries rose.

Reinvest Proceeds

"The labor report increases the chance that they make the decision to reinvest the proceeds of maturing mortgage-backed securities in short-term U.S. Treasuries at this meeting," said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. "They were heading in that direction anyway."

Bernanke outlined three options for additional ease in response last month to questions from Senator Richard Shelby, an Alabama Republican. The Fed chairman said in semi-annual testimony to Congress that the central bank could strengthen its commitment to keep interest rates low, or lower the rate it pays on bank reserves.

"The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases," Bernanke said.

The Standard and Poor's 500 Stock Index fell 0.8 percent to 1,116.71 at 2:53 p.m. in New York. Yields on U.S. 2-year notes fell below 0.5 percent for the first time as Treasuries rallied.

'Slow Drip'

"It's a slow drip of quantitative easing medicine rather than a big shot," said Robert Dye, senior economist at PNC Financial Services Group Inc. in Pittsburgh. "That’s going to be a mostly symbolic move telling the public that the Fed remains watchful."

Policy makers will probably "return to unconventional monetary easing by" late this year or early in 2011, Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc. in New York, said in a note to clients. Such steps may include "a more iron-clad commitment to low short-term policy rates" and more purchases of assets, probably Treasuries.

The Fed would purchase at least $1 trillion in additional assets, he said.

With 30-year mortgage rates trending around 4.5 percent to 4.75 percent, the Fed will have about $275 billion of its $1.1 trillion portfolio of mortgage-backed securities pay off over the course of this year, according to estimates by Barclays Capital Inc. That leaves about $23 billion a month for reinvestment if Fed officials choose that option.

$1 Trillion

Joseph Abate, Barclays' money market strategist in New York, said if the Fed chose to reinvest, that would signify they have a target for the level of excess bank reserves, currently at $1 trillion.

"Is the Fed trying to target a specific level of bank reserves?" he said. "I don’t think they are."

Barclays' economists don't expect the Fed to take more monetary policy steps at next week's meeting and for the remainder of 2010.

The Fed may communicate next week more attentiveness to downside risks to growth, said Laurence Meyer, senior managing director of Macroeconomic Advisers LLC and a former Fed governor. "We expect the committee to offer a more pessimistic assessment of the outlook in its statement," he said.

Meyer also said he hopes the Federal Open Market Committee will give consideration to the "risk management" strategy employed during the last deflation scare.

"The risk management approach calls for an easier policy today," Meyer said. "It is better to err on the side of being too easy when the risks to growth are decidedly to the downside and the costs of slower growth are high and the risks of higher inflation are low."

Still, Meyer said that, given the absence of any focus on the risk management approach so far, the threshold for taking action at the August meeting is high.

"It is a big deal to take a step toward easing after you have spent a year talking about the exit strategy," he said.

Thursday, August 5, 2010

Beware the Dragon's gold teeth---By Shan Saeed

China is putting itself in a position where dominance of the gold market, of which it is capable, could lead to it exerting global financial hegemony.

In April 2009, China bought 16 million ounces of Gold. There was a report from China that state-controlled organizations - as virtually all entities are in China - had launched marketing efforts at persuading its citizens to buy gold and silver as an investment. Not surprisingly with such an article, which we have been assured by our Chinese contacts is correct, there have been those who have accused us of falling prey to pure promotional hype from the gold lobby and there has been no such programme. But the facts belie the doubters with Chinese gold purchases by investors rocketing last year and this year as well.

The World Gold Council had entered an agreement with China's, and the world's, largest bank the Industrial & Commercial Bank of China (ICBC) (state-owned of course) to co-operate to promote gold investments in China.

China is further loosening its controls on the import and export of gold on the one hand, and on the other that it is also going to support Chinese company investment in overseas gold mining projects.

Does anyone notice a pattern emerging here?

China in particular, will effectively put a floor under the gold price - and that floor seems to be rising continuously as seen in the gold price's stair step advances in recent months. A senior Chinese official has stated publicly that the country will buy gold on the dips so as not to disrupt the market and undermine the US dollar - and there is perhaps more than anecdotal evidence that the Chinese government is buying gold, effectively surreptitiously, for its reserves, but not disclosing this until it reckons it is opportune so to do. Last time it announced an increase in gold reserves it had in fact been accumulating the yellow metal for 6 years before it actually made the fact public.

But why should China hold back dissemination of this information? The Chinese know that an announcement that shows it has accumulated a further large gold holding will move the gold price sharply upwards. (Another reason why China has not bought any of the IMF gold.) A resultant gold price leap could well be seen globally as a devaluation of the dollar, leading to yet another nail in the greenback's coffin, and given the dollar-related element in China's huge currency reserve surplus, that could be seen as not being in China's best interest - at least for now.

There has also been considerable evidence that Chinese companies (all state-controlled) have been buying up western investments - in the resource sector in particular - at a phenomenal, and seemingly ever-growing, rate. Some would say this is an attempt to convert some of the nation's huge dollar currency surplus into hard assets, while at the same time helping secure future supply lines for the global industrial giant. Some of China's top economists have gone on record as saying that they have little confidence in the long term future of the dollar as the only real reserve currency, and replacing some of its dollar reserves in this manner is probably - certainly - government policy.

But what this does mean to the West in general, and to the U.S.A. in particular, is don't screw with the Dragon. It has golden teeth which can really cause financial damage to the status quo if it should so wish, and it is also gaining a position where it can dominate the supply of many militarily strategic metals and minerals, not just gold, should any other country try and resort to gunboat diplomacy! The time is perhaps not ripe - yet, but every move that China makes in the resource sector in general, and in gold and in some particularly strategic metals and minerals (think rare earths) could be interpreted as a long term plan to make China top dog in the global economy and, at the same time, make it secure from any nation which might want to try to prevent it reaching this position of global dominance by any means.

But in the meantime it is set on keeping its own 1.4 billion population happy - and subservient. The best way of doing this is by continuing internal growth, which in turn is needed to generate the demand to fuel its industrial engine. 8% GDP growth is a bad year for China. What would most of the West's industrialised nations give for a growth rate of half that today? Within this policy, persuading its new, and rapidly growing, middle classes to invest in gold, and then ensure the metal continues to rise gradually in price, thus maintain wealth aspirations, is one way of keeping a potentially troublesome element of society more than happy.

Now maybe I'm being too cynical in my analysis, but history also suggests that some nations are prepared to look very long term in their approach to global business and politics, and ultimate dominance in both - and the Chinese seem to fit this pattern well. On the other hand a capitalist democracy is less well suited to extended planning of this type as fortunes of political parties wax and wane and agendas are constantly shifting. The world order is changing. The U.S. cannot exert its current global financial control for ever.

Copper Gold Ratio Predicts Higher Stock Prices

Since we’ve had movement in both the price of copper (up) and gold (down) I thought we’d check into the copper/gold ratio. The reason I’m interested in the price of copper in gold is that it has been an uncanny predictor of the S&P 500 recently:

copper gold ratio Aug 2010

The copper gold ratio was predicting lower prices for the S&P 500 index back in June.

Back then, the ratio fell below the lows it made in October 2009, November 2009 and February 2010. Soon stock prices followed.

Now, the ratio has made a bottom (in early June) and surpassed its previous lows (blue line). That would suggest that the early July lows in the S&P 500 will hold - assuming that this relationship between the commodities ratio and stock prices continues, of course.

Sunday, August 1, 2010

Defensive Currencies will continue to FLOURISH ---Yen and Swiss Franc


I strongly believe that the defensive currencies like Yen and Swiss Franc will continue to be supported and trend upward over the coming months. Historically speaking , Swiss franc has been very very stable for the last 57/58 years. There are even more reasons why this will happen — let’s delve into several of these reasons now.

Housing incentives just ended and mortgage approvals just dipped to a 13-year low as a result. Also, the Bush tax cuts that were enacted in 2001 and 2003 are set to expire at the end of this year unless Federal Reserve Chairman Ben Bernanke’s advice is heeded.

Bernanke recently told Congress that he favors preserving the Bush administration’s tax cuts to help the faltering U.S. economy. You know the economy is still riding on thin ice when the Fed governor suggested this. I’m sure that came as a real shock to Pelosi and the Democrats who want to allow the Bush tax cuts to expire and even raise taxes.

I’m sure they hated Bernanke’s comments because he was basically reiterating what the Republicans said needed to be done for a while now. It seems that the Republicans are more in tune to the economy right now than the Democrats.

Even Treasury Secretary Tim Geithner said that employers are very cautious about hiring and that they are trying to get more productivity out of the same workers because they fear that the economy isn’t growing fast enough to support hiring new workers.

Geithner also stated in a recent interview that the economy wasn’t growing fast enough. It seems that the Fed and Treasury are singing the same tune overall. The recovery figures are questionable. Currency manipulation is a big game. We are heading for protectionist controlled system.

So things aren’t looking so hot economically right now. Seems the some of the folks on Capitol Hill just don’t want to spook investors too much and let them know entirely how bad it is.

The economy shouldn’t get any better over the coming months either because historically the third quarter is a rough one. Consumer spending is bleak because consumers are saving up for Thanksgiving, Christmas, and other year-end holidays. So they cut back in order to spend more in the fourth quarter. Recession is not a business cycle but a consumer cycle. Simple

This is one reason why many major stock corrections happen during this time. Many stock market crashes have happened in the months of September and October, for instance. Watch out for the big news for the second round of printing money. Fed will commence quantitative easy in September/October-2010....

Another concern of mine is the weekly unemployment claims numbers. They were nose-diving (which would have been a good thing), but now they are treading sideways and seem to be hinting that they could begin to rise again soon.

Also, I don’t think investors are comforted by the passing of the recent financial reform bill that allows the government to break up large corporations that pose systematic risks to the economy. After all, it would be at the government’s discretion and not the company’s discretion if it was a candidate to be broken up.

It’s things like this that make me feel like we’re moving into more of a socialist type of government than a democracy.

Of course, the final reasons all have to do with the potential for an outbreak of wars.

We know that the United States has sent naval ships over to South Korea to train with that country. They’ve just started up their training exercises together, and North Korea is now threatening to use its nuclear weapons as a result.

Then there’s Iran — as of June, the United States and United Nations put sanctions on Iran due to its insistence on continuing its uranium enrichment program. Not only has Iran been cut off all over the world now, but the U.S. Treasury has threatened international banks that are accepting dollar transactions from Iran. The Treasury stated that they run the risk of being banned from the U.S. banking system.

At the same time, Iran is stating that it may stop receiving payments for its oil in dollars or euros and that it may instead choose to receive payments only in the UAE’s dirham.

All of this is tightening down the bolts a bit more on Iran and could spur it to take action sooner if it were to lash out. The first country that they would lash out at would be Israel. of course. Israel knows that and that’s why it may do a pre-emptive strike upon Iran first before that country is fully able to develop out its nuclear weapons.

Honestly, if any of these actions above happen [or any combination of them], it will cause the defensive currencies to do quite well over the coming months, and it will hurt the higher-yielding currencies as investors run for cover.

So get ready for some crazy times that most likely lie before us. It’s not going to be pretty out there, but for the currency investor there’s always opportunity no matter what happens. That’s the good news.


I am sure many of the euro bears are shocked by the currency’s rally to above 1.30 Thursday morning. Euro lost 17% of its value in 6-months against Dollar and is now bouncing back. It’s not surprising to me.

There are some things we must realize about currencies. As we are on a pure fiat system right now, everyone can print and spend as much as they want with no consequences. What made me laugh about the dollar bulls calling for a euro collapse was that they were looking for the euro to collapse against the dollar. Like the dollar is some kind of safe haven with the insane policies of endless spending going on at the federal level.

What we must realize is that currencies, for the most part, are just floating abstractions that are linked to nothing. They tend to trade on sentiment.

An indicator I watch is the Daily Sentiment Index, which tracks the sentiment about currencies by traders.

When the consensus is too bearish, you want to buy. When it is too bullish, you want to sell.

Last autumn, when the U.S. dollar was falling, the sentiment index saw a low reading of 4 percent. Not surprisingly, the dollar bottomed and saw a huge rally in early 2010.

The sentiment on the euro then hit 3.7% in May 2010 right before the euro really began to rally big time.

Because there is really no fundamental backing behind most of the currencies, you must buy them on bouts of fear and declines.

The euro saw such extreme sentiment back in May and rallied.

I would not be surprised that — after a short-term pullback — it continues this rally to the 1.35 to 1.40 range. THE GOLDEN RULE IS "when it comes to currencies: buy during negative sentiment"