Friday, January 28, 2011

Warnings signals for global economy-----by Shan Saeed

Warning Signs are dangerous for 2011. Caveat is here to stay.

Do you witness all of the warning signs that are flashing all around you? These days it seems like there is more bad economic news in a single week than there used to be in an entire month. 2011 is already shaping up to be a very dark year for the world economy per se. We would have food crisis in 2011 and history would be repeated. The price of food is shooting through the roof and we have already seen violent food riots in countries like Egypt, Algeria and Tunisia. World financial markets are becoming increasingly chaotic/ unstable as the sovereign debt crisis continues to get worse in Europe, Japan, UK and USA. Meanwhile, the number of Americans applying for unemployment benefits is up, foreclosures are up and poverty continues to spread like a plague throughout the United States. What we are starting to see around the globe is a lot like the "stagflation" of the 1970s. High inflation and high unemployment. All of the crazy money printing [ Quantitative easing or Monetary accommodation] that has been going on is overheating prices for agricultural commodities and precious metals [ Gold/ Silver], but all of this new money is not doing much to help the average man or woman on the street. QE wont fix the economy. Infact, it would create asset market inflation in the emerging economies.

Do you remember what the economy was like in America during the 70s? Richard Nixon was heading the government. It had high unemployment and high inflation at the same time. It was horrible. Well, all the warning signs are there for a stagflation repeat. Unemployment is at epidemic levels over 10% and it isn't showing any signs of decreasing much any time soon. Meanwhile, the crazy money printing that the Federal Reserve and other central banks have been doing is starting to cause significant inflation. The price of oil is about to cross the $117 per barrel mark and the UN is forecasting that the global price of food is going to increase by 37 percent by the end of the year.

So, yes, there are some really, really good reasons to be incredibly concerned about the global economy in 2011. This year would be much more dangerous than 2010.

Meanwhile, the only solutions that global leaders seem to be offering are more money printing, more government debt and more financial control by international organizations. are these solutions viable? I doubt.

The truth is that we have a real mess on our hands. The following are 20 economic warning signs that should be of great concern to the global decision makers ....

#1 Over the past seven days, the price of wheat has risen by 17 percent as concerns about food shortages continue to grow around the world.

#2 The price of corn is up a staggering 97 percent since June-2010.

#3 The United Nations is projecting that the global price of food will increase by 37 percent in 2011.

#4 According to the U.S. Department of Labor, the number of Americans applying for unemployment benefits rose last week to the highest level since last October.

#5 According to the Pew Charitable Trusts, of the 15 million Americans "officially" unemployed in December, 30% of them had been unemployed for one year or longer. According to Nobel Laureates Paul Krugman at Princeton University and Joseph Stiglitz at Columbia University, these are turbulent signs for the economy.

#6 Beginning in the month of March-2011, the U.S. Postal Service will begin shutting down up to 2,000 post offices across the United States.

#7 In an absolutely stunning move, Standard & Poor's has downgraded Japanese government debt from AA to AA-. Please read Bloomberg News

#8 73 percent of the major metropolitan areas in the United States had more foreclosures in 2010 than they did in 2009.

#9 Approximately 5 million homeowners in the United States are at least two months behind on their mortgages, and it is being projected that over a million American families will be booted out of their homes this year alone.

#10 According to the Congressional Budget Office, the Social Security system will run a deficit of 45 billion dollars this year. When the new payroll tax breaks are factored in, the projected "Social Security deficit" for this year swells to 133 billion dollars.

#11 The U.S. money supply has been rising at a pace that is absolutely unprecedented.

#12 Right now, money is flowing out of bonds at an absolutely staggering pace. Bond market is risky and is in a default like situation.

#13 The U.S. Bureau of Labor Statistics says that the price of food increased 50 percent faster than the overall rate of inflation during 2010.

#14 According to the U.S. Conference of Mayors, visits to soup kitchens are up 24 percent over the past year.

#15 During the last school year, almost half of all school children in the state of Illinois came from families that were considered to be "low-income". I have studied from University of Chicago and spent my time there.

#16 Those living in the town of Discovery Bay, California will soon not be permitted to use cash to pay for any public services. Could this be another disturbing step in the direction of a cashless society? 41 States in USA are acting like Greece and Ireland.

#17 French President Nicolas Sarkozy says that the IMF should be given the power to enforce new rules that would be designed to prevent "global economic imbalances" from happening. Monetary dumping should be stopped by the USA i.e. Quantitative Easing or Monetary Accommodation.

#18 The U.S. government is currently borrowing about 40 cents of every single dollar that it spends.

#19 According to the Congressional Budget Office, the U.S. government will have the biggest budget deficit ever recorded (approximately 1.5 trillion dollars) in 2011.

#20 It is being projected that the U.S. national debt will increase by $150,000 per U.S. household between 2009 and 2021. Household debt to GDP ratio is 122%.

So is there any good news?

Well, yes there is.

U.S. Representative Ron Paul has introduced a new bill to audit the Federal Reserve. Let's hope that the move to audit the Fed fares better in the 112th Congress than it did in the 111th Congress. It would be wonderful if the American people could actually learn what has been going on inside the Fed all this time.

But mostly the news about the global economy is really bad. There have been some people that have been warning for decades that all of this money printing and all of this government debt would eventually catch up with us. Now it has almost reached the moment of reckoning that the doomsayers have been warning about for so long, and it is going to be really painful to go through it.

Thanks to the greatest debt bubble in the history of the world, living beyond the means for decades in USA. When "times were good" it was not because either the Republicans or the Democrats were doing something right. The truth is that both political parties have been horribly addicted to government debt[ $14 TRILLION right now]. The debt-fueled prosperity that USA politicians purchased is starting to come to an end, and an economic implosion is coming that most Americans will never see coming. But hopefully most of the readers of this article are much wiser than the average American. Warning signs are there. Now is the time to take action and get prepared.

Disclaimer: This is just a research report and not an investment advice. Investors are encouraged to execute their own due diligence before making any strategic investment or decisions.

Monday, January 24, 2011

Three Major Macro Economic Issues Coming in 2011---By Shan Saeed

Three Major Macro Economic Issues this year: What’s Coming in 2011
By Shan Saeed

Christmas ended on a docile note. The New Year’s celebrations were held privately in most part of the world on a somber way as well. There are lots of headwinds in the global financial markets and as we navigate through turbulent times, markets do hold some opportunities for smart and savvy investors.
Firstly, the biggest macro-economic story of 2010 was Europe: It’s falling apart, and there doesn’t seem to be anything that’s going to stop this collapse or default like situation. In 2011, its going to be a real challenge.

The second biggest macro-economic story of the year—though not by much—was the successful monetization of 75% of the U.S. Federal government deficit [$14 trillion] by Ben Bernanke and the Federal Reserve. I use the word “successful” in a morality-free, completely pragmatic sense: Bernanke achieved monetization with minimal market disruption. In fact, a lot of people would argue that QE-lite and QE-2 were not policies of debt monetization—that is how successful Bernanke has been. The real confidence level is very low…….This “success” has allowed the U.S. Federal government to continue to avoid making necessary, critical budgetary decisions—paradoxically accelerating the U.S.’s deteriorating fiscal situation. Stimulus would continue to provide breathing space to the US economy.

The third biggest macro-economic story of 2010 has been the inexorable rise in commodity prices. Everyone’s been paying attention to silver and gold, but the real story has been industrial metals—especially copper/Uranium—and agricultural commodities—especially grains—especially Wheat, Rice, Sugar, Soya bean and corn, corn, corn!

To be sure, there were other important stories in 2010—the Mortgage Mess, Wikileaks, Wayne Rooney. But these three issues—auguries of EMU collapse; successful Fed monetization, and commodity price rises—are the ones that mattered on a macro-economic level this past year. In 2011, every other financial story will be either a cause or consequence of one of these three issues: Guaranteed.


Europe is in deep mess. Some people might call it deep shit—there’s really no polite way to say it.

Back in the spring of 2010, Greece went down the tubes, as its sovereign debt collapsed in price, and its ability to borrow money from the open markets—and thereby continue to operate—for all intents and purposes ceased.

Then in November/December of 2010, the Irish sovereign debt also began to tumble, as it became increasingly clear that Ireland simply does not have the wherewithal to backstop it’s disproportionately large—and insolvent—banking sector. All banks in Europe passed the sham STRESS TEST. It was an illusion and ineffective to control the storm. Angela Merkel’s less than clever words in an interview [to the effect that Irish debt holders might have to take a haircut] sparked a rise in Irish debt yields, squeezing Ireland’s ability to borrow fresh cash to keep its insolvent banks afloat—thereby creating the need for a rescue package from the IMF, the UK, the European Union, and the European Central Bank.

What was painfully apparent in 2010 was that the Eurozone and the European Union had no mechanism to handle a crisis in one of its member states. Nor is it moving forward to correct the single biggest weakness of the euro scheme—namely, the ability of each member state to issue its own debt. Internal Devaluation, and printing of money could have been the remedy provided they had not joined Euro currency.

In May of 2010—over a decade since the introduction of the euro—the EU finally came up with a mechanism to salvage the broken economy of one of its member states, the European Financial Stability Facility (EFSF).
Stability Facility: Even its very name sounds funny, cartoonish and silly—which fits with the general cartoonishness of the European crisis response, first to Greece, then to Ireland, Portugal, Spain and Italy.

The concept of the EFSF—at least in theory—is for the member states to contribute to a €440 billion fund. In reality, the EFSF has no money, but rather, it will issue debt. Therefore, what’s really happened in the case of Greece and Ireland is that their bad debts were taken over by the EFSF—so in a sense, no one has been bailed out: Rather, the bad debts have been transferred to the European Monetary Union as a whole.

This is the European model of bailouts: In exchange for handing over their fiscal sovereignty and having tough austerity measures put in place—but without harming a single hair on the head of a single sovereign bond holder—Greece and Ireland had their debts taken over by the EU. Which is fine—for the smaller countries with their smaller economies, and their weaker political pull.

But what about a big country? What about a country like Spain? It requires $600 billion in bail out funds. Huge drag on the economy and threat to the stability of Euro. After the Greek and Irish bailouts, it looks like Portugal and possibly Belgium / France are up next in this perverse game of musical chairs played to the tune of sovereign debt—but these smaller countries are dwarfed by Spain: Spain, as I argued here, is where the European game is really at.

As I pointed out, Spain is twice the size of Greece, Ireland and Portugal combined—Spain is roughly half the size of Germany—Spain has a fiscal deficit of over 11% of GDP for 2010, unemployment rate of 21% and a total debt of over 80% of GDP. I am counting the accumulated debt of comunidades autónomas, which is so far 10.2% of GDP and steadily rising. In short, Spain is trouble.

Not “Spain is in trouble”—that’s obvious, but that’s not my point: Spain is trouble. Trouble for the German banks that own so much of the Spanish debt. Trouble for Germany, which is propping up its insolvent banks [What, you think German politicians are any less craven than American politicians?]. Spain is trouble for the European Union, for what a German banking crisis might mean for the EU as a whole and as an institution. More than anything, Spain is trouble for the European Financial Stability Facility, because Spain is too big to be saved—and there’s really no way to finesse that hard fact.

In the case of Europe, the lynchpin can come off awfully fast—think of Ireland. A few impolitic words from Angela Merkel, and suddenly the Irish bond market panics. Suddenly, Ireland is teetering on the brink of insolvency, unable to meet its funding needs. And that was Ireland—all due respect to those wonderful people, but we’re talking a GDP of a paltry $227 billion. Ben Bernanke takes a morning dump bigger than that. What’s Ireland’s $227 billion when compared to Spain’s economy of $1.5 trillion?

Spain: During 2011, Spain will be the flash-point—so you want to keep one eye on Spanish sovereign bond spreads, and one eye on Brussels: When Spanish debt spreads over German bunds creep into the 3.5% to 4% range, you know trouble is coming. And when the Spanish spread decisively crosses 4.25% over the German 10-year, then you know trouble’s arrived—and it won’t be leaving town ‘til it’s had its chance to run riot in the streets. How the EU and the ECB handle an eventual Spanish sovereign debt crisis will determine the very future of the European Union.

Because there will be a Spanish sovereign debt crisis—it’s inevitable. The Spanish balance sheet is not improving fast enough, even with so-called “austerity” measures, because even though the Spanish government might be cutting spending, the comunidades autónomas—roughly analogous to states or regions—are expanding their budgets in order to take up the slack, and thereby increasing the Spanish deficit. Don’t believe me?
So when Spain goes into crisis—which should take place no later than June-August 2011, and perhaps as early as this coming March—the European Union’s collective and institutional reaction to this crisis event will determine whether a smaller, healthier European Monetary Union continues to exist, or whether the whole concept of EMU is ripped to shreds by events.

If the EU and the ECB are clever, and brave, and humble in the face of failure, then they’ll expel Greece, Ireland, Portugal, Spain and Italy from the European Monetary Union. The euro will remain the currency of the stronger economies—France, Holland, Germany—while the weaker economies will go back to their original currencies, and immediately devalue, reschedule the debt and follow internal devaluation so as to kickstart their economies.

If, however, the European Union and European Central Bank leadership proves to be stupid, cowardly, and arrogant—as is very likely, considering their confused, self-defeating actions and reactions to the Greek and Irish crises—then there will be some sort of European-wide convulsion, when the bond markets panic, and leave Spain locked out of any funding. This is the key event of 2011: Whether the European Monetary Union survives. Survivability of Europe is the key in the global financial markets. Unless Brussels gets its collective shit together and realizes it has to cut the weaker economies loose from the euro, odds are high the euro goes out of the roof in crisis situation.

U.S. Fiscal Situation—Local, State and Federal

There is a limit to sympathy: You can feel sorry for someone—but only up to a point. In so far as the United States’ fiscal situation is concerned, that point has been reached, at least for me: I can no longer feel sorry for the American people.

Americans want more services and entitlements, but with less taxes—and then they’re all surprised when their local, state and Federal governments cross the edge of insolvency, and into the nightmare land of feverishly staving off bankruptcy. California, Illinois, Michigan and Florida are facing Greece like situation. 41 states in USA are acting like Greece and Ireland.

During 2010, the Federal government debt finally crossed the 100% of GDP mark—and continued rising non-stop. Actually, the debt’s growth accelerated. Why? Because the Bush tax cuts of 2001—implemented when there was an expectation of surplus, with clear sunset provisions, and no massive war expenditures—were extended by the mindless Republican Congress and the spineless President, Barack Obama.

So the U.S. Federal government will continue to add to the debt, at the rate of 10% per year for 2011, 2012, 2013 and 2014. Some might argue with the 2013 and 2014 extrapolations. I’ll concede them: But that still leaves the U.S. Federal government with a debt burden of 120% of GDP by 2012—those are Greek levels of debt. And even if by some miracle tax receipts increase after 2012, so that the deficits in 2013 and 2014 are not 10% of GDP, what will they be? 7% of GDP? Maybe even 5% of GDP? So total debt would be $20 trillion by 2014 will be only 130% of GDP, instead of 140%. In FY2010, the 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.

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.

And that’s not counting the State and Local governments.

In late 2010, we finally started to notice something which has been festering for years, like one of those yucky worms that winds up eating your brains and driving you mad: The financial condition of the U.S. States and municipalities—they’re bankrupt.

For fiscal year 2010, the states’ combined budget shortfall is $191 billion. Of that figure, $68 billion is offset by the Recovery Act—Obama’s stimulus. Currently, the 2011 combined deficit of the States will be in the neighborhood of $160 billion—but that doesn’t seem credible, considering the ongoing unemployment. Regardless, $59 billion of those will be offset by the Recovery Act—which still leaves at least $100 billion up in the air. However you look at it, the States have a huge collective hole in their budgets. And this hole is going to get worse, before it gets any better—just like the Federal government’s massive yearly deficit.

Which brings me to Federal Reserve policy in 2010—specifically the announcement and implementation of further rounds of “Quantitative Easing”.

Call it QE, call it “liquidity injections”, call it “interest rate stabilization”, call it “Fed balance sheet expansion”, call it “monetary accommodation”—whatever clever name you give it, it’s basically money printing, plain and simple: The Federal Reserve “implements” QE by simply creating money out of thin air, then going out and buying bonds with that new money. Actually, it’s even better than printing money—no bothers with printing presses and such. QE is going global to other ZONES like Japan, UK, Europe

There were two rounds of QE in 2010: QE-lite in the early summer, whereby the Fed reinvested the excedent of it Mortgage Backed Security holdings into Treasury bonds, which will total between $200 and $300 billion between August 2010 and August 2011; and QE-2, whereby the Fed began purchasing Treasuries directly, in $75 billion monthly increments over the eight months between November 2010 and June 2011, Ben and the Fed reserving for themselves the right to continue—or expand—their Treasury bond purchases as the drones as the Eccles Building see fit.

Now, why did Ben Bernanke and his Federal Reserve smart people implement QE-lite and Quantitative Easing 2? The [mainstream] answer is, As a way to prop up the U.S. economy by keeping interest rates low via liquidity. The [mainstream] reasoning is, By keeping interest rates low, Ben and the Fed want to encourage borrowing, and thereby reactivate the economy. But let’s ask a different question—an It’s a Wonderful Life counterfactual history question:

If Ben and the Fed had not been there to buy up Treasury bonds via QE-lite and QE-2, what would the U.S. Treasury Department have had to do, in order to fund the Federal government? In other words, Would the Federal government have been able to finance itself without Federal Reserve purchases? Without QE-lite and QE-2?

It all depends on the numbers: What’s the Treasury shortfall, and what’s the size of QE-lite and QE-2.

Well—and this is just back-of-the-envelope numbers—the Federal government deficit is about $1.3 trillion. Meanwhile, between August 2010 to August 2011, QE-lite [$200 to $300 billion] and QE-2 [$600 billion] will add up to at least $1 trillion in Treasury bond purchases by the Federal Reserve. One could say that the Federal Reserve is monetizing between 63% and 71% of the Treasury’s issuance for FY 2011. So, a $1.3 trillion shortfall and $1 trillion in money printing . . .

Not only that, they did it with minimal market disruption—and in the case of the equities markets, Fed monetization actually improved those markets: Just like really expensive make-up applied to a dead guy, Bernanke’s monetization gave a false sense of corporate health and vigor to the stock market.
Bernanke’s successful monetization of the bulk of the U.S. Federal government deficit in 2010 was not a one-off: It will continue unabated for the foreseeable future—horrible public policy tends to follow Newton’s laws of motion.

That was the story of America’s finances in 2010: The United States officially became a printing money republic—with nukes.

Look at the evidence: The budgetary questions in Washington are not either/or—they are both/and: Stimulus spending and Bush tax cut extensions and never-ending wars and health care reform and the creation of a police-state. The clowns in Washington have been able to eat their cake and have it too, with nary a thought as to cutting spending. Ben Bernanke’s successful monetization of 75% of the new Treasury debt issuance is the direct cause of this policy mentality.

It’ll only be a matter of time before the bankrupt States take advantage of this both/and mentality—and in no time at all, the political pressure from the States to have the Federal government bail them out will become an overwhelming clamor: Especially as pensions—and therefore pensioners, who always vote—become increasingly affected. Therefore—as a direct byproduct of Bernanke’s “successful” monetization of the U.S. Federal deficit, and the resultant lack of need on the part of the political class to make true budgetary decisions—I am confident in predicting that in 2011, there will be another round of “stimulus”.

Don’t act so surprised: The State budget bailout package will be a “little” stimulus in the $400 to $500 billion range—but it will be explained away as being both “necessary” and “targeted”, with the explicit aim of propping up the bankrupt States and municipalities. This “targetting” will make it politically popular, and therefore insure its passage.

Now, the Fed’s monetization of the deficit should have some incidence on the Treasury bond market—shouldn’t it? Here—I confess—I’m at a bit of a loss:

On the one hand, Treasury bond yields ought to rise, as the Federal government continues to spend like there’s no tomorrow, and slowly but inexorably positions itself to take over State and municipal liabilities, especially pension liabilities [which is what’s really killing the State balance sheets].

On the other hand, since the Federal Reserve is the buyer of 75% of the debt the Treasury Department issues, the Fed ought to be able to squeeze yields whichever way it wants to—which is exactly what it seems to have done: During 2010, the 10-year Treasury bond yield fluctuated between 2.41% (in October) and 4.01% (in April); today as I write it’s at 3.50% even.

This would seem to prove that the Fed has the yield curve well in hand—therefore, if this really is the case, then the Treasury bond market is useless as a sign of anything. Just like the equities market, Treasuries are a rigged game that signify nothing.

What asset class is reacting more or less rationally to what has been going on in Europe and the United States? Commodities.


Commodities rose drastically all throughout 2010: Every single commodity class, every single one of them rising by double digit percentage points—at least.

You can talk to me about wheat rising because of wildfires in Russia, oil rising because of the BP spill in the Gulf of Mexico, copper rising because of the trapped miners in Chile, silver rising because JP Morgan tried to do like the Hunt brothers, gold rising because a lot of Chinese want gold for their teeth fillings or investment in portfolio instead of porcelain, corn rising because Martha Stewart and Nigella Lawson simultaneously declared it their favorite ingredient.

—or I could argue that commodities of all classes are rising because the markets are afraid of Treasury bond weakness and continued irresponsible monetary policy, so they’re looking for a safe haven to replace Treasuries. Commodities of all strategic classes have been steadily rising—are it because a whole host of various causes have led these myriad commodities all to rise? Or is it because a single common cause is driving them all up?

Now, I think that commodities are rising because of market fear of the U.S. fiscal profligacy. I can argue that position from the commodities’ side of the equation—no sweat. But I just can’t prove my case when I cross over to the Treasuries’ side.

I can’t prove it because there has not been the movement in Treasury bonds which would signal that that is the case. I could point to Treasury yields rising 100 basis points since the October—but that’s what you call evidence, even if you deign to call it “evidence”. A decisive break-out in yields above 4% on the 10-year over the next two-to-three months—that would be sort of compelling. But a drift up from 2.5% to 3.5% at the end of the year? That’s nothing.

My own thinking is, the reason there hasn’t been a drastic, unequivocal fall in Treasury bond prices is because of the aforementioned Fed grip on yields: It is neither the Fed’s strategic intent nor in its interest to have Treasury bond yields widen. What with a 75% market position in new debt issuance, it ought to be a snap for Ben and the Fed to keep yields low.

Therefore, I think that market participants are going into commodities for safe haven, even as they are exiting Treasuries. I do not think there is a correlation between commodities’ rise and equities’ rise: I think equities are the speculative play, with the market riding the bubble Bernanke is blowing, whereas commodities are where the market is going as the safe haven play. Strange but true—all because of Bernanke’s manipulation of the Treasury yield, and cornering of the Treasury market. Commodities are hedge are uncertainty and chaos.

I think this is happening—but I hate to rest my argument on such an inference, a teleological inference: I sound like a conspiracy theory specialist —“The Fed is doing it! The Fed is manipulating T-bond prices! The Fed is behind The Conspiracy!” The Fed manipulating the Treasury bond yields to the point where they sit on their hind legs and beg for a crunchy cookie.

Commodity Price Rise: What To Pay Attention To In 2011

I know I have the reputation for being bullish on commodities. You don’t have to buy any of bullishness argument to acknowledge the fact that,
a., commodity prices have experienced a sustained and enormous rise in their prices, and
b., this sustained rise in the prices of commodities will inevitably hit consumers at all levels of the economy.
Therefore, I would expect food, heating oil, precious metals, industrial metals and gas prices to rise considerably over the winter of 2011—that is, now. This will be a knee to the ‘nads of the American economy—indeed, to the world economies. There’s really not much more to say, about the issue: A sharp rise in consumer spending on essentials would shove the American and world economies firmly back into recession, this time potentially with negative growth.

Bottom Line in 2011

My strategic analysis takes me to a situation where, the EMU situation will come to a head this year, likely before the summer, and it will be because of Spain.

As to commodities, their strong, steady rise in price will reach the wider economy starting this winter, and shove it down into a recession, likely deeper than the last one. [Possibly—even likely—this slow-down will trigger the Spanish crisis]

The wild car in this trio is Bernanke and the Fed: Extend QE-2 indefinitely, as they’ve hinted, or grow some balls and force the Congress, the White House and the political establishment to get serious and cut spending? No surprise, my money is the people of the Eccles Building extend QE-2, and continue with their 75% monetization of new Treasury issuance.

So bottom line: It’s looking like 2011 is going to be very exciting. At least two of these three story-lines are going to come to their respective climaxes this year—so 2011 might well suck, but at least it’ll be exciting! I take my cheer where I can find it.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any strategic investments or entering into any financial transactions / contracts.

Saturday, January 22, 2011

Gold is going through Cold Spell---By Shan Saeed

Gold is having a resting time and looking for some investors to start buying at the dip......Upsurge will happen after February/ March-2011

Gold bull run will continue in 2011. My conservative estimate is $1547/ounce for 2011. What's funny about bull markets is that no matter what the sector [ Energy, technology, Mines, airlines, gold, Wheat etc.], they always trade the same way. Pull back and consolidation are part of all financial transactions. Commodities are not different from them.

This means that bull markets climb [a wall of worry]. Every time there is a dip in the bull market, people begin to cry wolf and scream, "The sky is falling!" Is the sky really falling? The answer is yes on countries like Ireland, Greece, Spain, Portugal, Belgium, France, UK and USA where economies are deep in debt and fiscal mismanagement......

Investors think the bull market is over. Fear creeps into the minds quickly and they forget about fundamentals. What I find funny is how fast the sentiment has turned against Gold, Silver and Copper. I am still bullish on these commodities as financial markets would remain uncertain and volatile for the next 2-years till 2012

Gold, after all, just hit an all-time high last month with 1431/oz on 7th Dec-2010 and has just dropped about $77, or 6 %, from its high. People are acting like the sky is falling and the bull market is over. But, I think its a brilliant buying opportunity for the long run...These times won't come back.


Lets analyze it strategically and look at the commodities prices especially Gold.

In the past 10 years, seven of the 10 yearly lows for gold have occurred in January or February. Gold often sees weakness early in the year. You bet..Its happens always

For example, in 2009 gold dipped to $810 in the first quarter then finished the year at $1,096 an ounce. Last year in 2010, gold bottomed at $1,044 on 26 February and finished the year at $1,370. Therefore, as we can see, if you buy these dips early in the year it usually pays off as the gold price usually rises throughout the rest of the year.

We should remember that despite the talk of improving economies and rate increases in Brazil and China, nothing has really changed. China, Japan and Russia have got $2.9 trillion, $1.4 trillion and $900 billion respectively the reserves in their kitty. Euro solvency crisis has yet to be resolved. Spain, Italy, Portugal, Belgium, France are all in Red in the balance sheets. Fiscal indiscipline and profligacy would continue to slow down their economies.

QE has gone global with ECB, BOJ and BOE are all following the same road map as laid down by FED Chairman Ben Benanke. Printing money to keep the economies moving. You call it printing money or increase in monetary base, or interest rate stabilization or balance sheet expansion or quantitive easing or monetary easing/accommodation. Governments are still spending like crazy. The U.S. deficit is still going to be far north of $1 trillion this year i.e. 2011. US overall deficit would touch $20 trillion by 2014. The disasters of Medicare and Medicaid, in the form of unfunded liabilities, are still to come. US dollar would stay weak in 2011 against all major currencies like Yen, Canadian, Aussie Dollar and Pound sterling

This is just a normal correction in gold and excellent buying opportunity for the long run in commodities. Buy Gold, Silver, Oil, Palladium, Copper, Uranium, Wheat, Rice, Cotton, Corn, Soybean and Natural Gas.....Chinese consumers, Russain consumers, Arabs Central Bank, Hedge funds in USA and big players like Marc Faber/George Soros are all buying Gold and Silver. These are REAL CURRENCIES/ASSETS.....

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence and research work before making strategic investment or taking decision in the short or long run. Research is the key for any investment.

Friday, January 7, 2011

New reserve currency: Renminbi-Yuan by Shan Saeed

Chinese Yuan or Renminbi would be one of the currencies where central banks most likely park their funds going forward. Apart from Gold and Silver which are REAL CURRENCIES, Yuan would take a market share in reserves of central banks very quickly.

Make no mistakes, existing global financial system depends on the widespread use of fiat currencies issued by insolvent governments of advance economies. Wealth of the world’s large financial institutions requires that there be currencies with sufficient size and circulation to absorb massive capital flows.

The current system is based primarily on the dollar; with a $14.3 trillion economy, the United States was for years the only country in the world with a sufficient money supply and financial infrastructure to take in the preponderance of the world’s wealth.

It is for this reason commercial loans, commodities contracts like oil payments, international reserves [62% in USD], and cross border settlements have traditionally been denominated in US dollars.

Competing reserve currencies arose with the advent of the euro and Japan’s post-war rise; while the dollar has continued to remain dominant, these three are the only currencies which have the necessary supply and credit rating.

With trillions of dollars floating around the global financial system, managers are constantly making capital allocation decisions or asset allocation in their portfolios, moving funds in and out of various instruments like bonds, commodities, equties and currencies. The reserve currencies play a big role in this because unallocated capital is frequently parked in their bond markets. Bond market is very bearish and sovereign default risk is high as the moment. Yield curves are the perfect predictive of the future growth of economies.

For example, large corporations or banks that are sitting on billions of dollars in cash typically purchase short-term US or European government bonds because the low default risk. But game has changed. Sovereign default risk is going of the roof. New challenge for IMF.

The dollar, euro, and yen have bond markets of such size that getting liquid is never a problem, even for billions of dollars. There is always a market for treasury securities, hence they are considered ‘cash equivalents’.

You couldn’t execute the same thing in the Kingdom of Bhutan with its tiny $3.7 billion economy. If you tried to move $100 million into Bhutan, its currency [the ngultrum] would spike. In the US, Europe, and Japan, $100 million barely registers a blip.

Over the last few years, though, the confidence has begun to fade quickly, and the reserve currency issuing governments are starting to be viewed with increasing skepticism.

The thing that’s missing right now is an acceptable alternative. There’s really nothing out there in large enough scale to withstand massive capital flows, and as I have written before, the game is now one of judging the ‘least worst’ of these three major currencies.

In what seems to be a 6-month cycle, the dollar and euro have been jockeying for the ‘worst of the worst’ title; markets focus on Greek woes for a few months, Ireland, Spain is coming soon, then turn their attention back to California and Obamanomics. Spain/Italy/Portugal/Belgium/France are all in the line of fire. Fiscal mismanagment and Budegt deficits are all messed up in these countries. Euro single currency would be a toast for the next 6-months ending on 30 June 2011. While Dollar would be a toast for the remaining part of the year ending on December 31, 2011. US dollar would losr 9-10% of its value against Pound Sterling, Yen, Canadian Dollar and Euro

With Bernanke’s “100% certainty” and nonsensical economic numbers coming out of the America’s Media and Press, it seems to be back in a period where the markets are more concerned with Europe. I think that Japan will be called to the carpet before too long as well.

As such, in an almost ritualistic cycle, financial markets are shifting funds around these currencies… the analogy I like to think of is like a series of buckets.

Imagine three buckets and an increasing volume of water. Capital allocators are essentially dumping the contents of one pail into another– from the dollar bucket into the euro and yen bucket, and from the euro bucket back into the dollar bucket.

Each time this happens, though, a little bit of water spills out into smaller buckets– Gold, Silver, Switzerland, Norway, Canada, Chile, Australia, etc.

All throughout, central bankers are standing there keeping the spigot at full blast, pumping more water into the system while bankers desperately try to find the least leaky balance.

What’s required is a new bucket that bankers view as strong, sturdy, and large enough to handle the volume. The most likely candidate is the Chinese renminbi… but not yet.

China’s economy is set to be the largest in the world in a matter of years in 5 years time, and it has the money supply to match. While its economic and monetary fundamentals are far, far from perfect, China is arguably in a much better financial position than the west.

It’s going to take several years for the renminbi to overtake the dollar, euro, and yen as a serious contender for the world’s main reserve currency… but it can happen. The major roadblock is that China’s renminbi is not free-floating– the government has imposed severe exchange controls. Capital controls are the big impediment.

I’ve written before that we are seeing the early signs of relaxing controls. China doesn’t do anything overnight, and I think there is a strategic / long-term plan in place that Chinese leadership is working upon. I admire Chinese leadership and its strategic economic insight.

We have already seen China agree with other sovereign nations to introduce currency swap arrangements, so there are now several countries holding renminbi. Furthermore, the Hong Kong gold exchange recently announced its plans to launch a new gold contract denominated in renminbi.

To be clear, China already has its own gold exchange, but having one in Hong Kong opens up renminbi-denominated gold contracts to the entire world since Hong Kong has no exchange controls. Shanghai Gold Exchange was set up in 2001 and one of the busiest exchange centres around the world. PBC [ the chinese central bank] has allowed 5 banks to make Gold and Silver related transactions for clients.

On that note, the mainland authorized Hong Kong’s banks to establish cross-border settlement accounts in renminbi last year, effectively providing a way for people to open a renminbi bank account. In fact, we have one.

Each of these measures to reduce exchange controls is one step closer to the renminbi being introduced as a global reserve currency.

Perhaps the most obvious step, though, came in just the last few days. Beijing has already allowed several multinational companies like McDonald’s and Caterpillar to issue renminbi denominated bonds. Now the World Bank, that unfortunate staple of the financial system, is issuing its own two-year renminbi bond. Chinese government has started doing trade with Malaysia, South Korea, Russia and Indonesia in Yuan related transacations. All reported in big press.

This is a big deal… and I think that we’re going to continue to see bigger and bigger steps like this taken throughout 2011 and in the coming years.

China’s government has been very clear that by 2020, it wants Shanghai to be a leading global financial center… and Chinese policymakers know that for Shanghai to be a financial center, the renminbi must be freely convertible. The deadline is all set to be followed. If you haven’t started making decisions to preserve your capital, I strongly urge you to start now. Ponder upon Chinese Yuan in the evening

Disclaimer: This is just a research piece and not an investment advice. Investors are strongly encouraged to execute their own due diligence before making any investment or strategic asset allocation of their portfolios.