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