Thursday, June 30, 2011

What if Greece goes down--By Shan Saeed

THE European Union seems to have adopted a new rule: if a plan is not working, stick to it. Despite the thousands protesting in Athens, despite the judders in the markets, Europe’s leaders have a neat timetable to solve the euro zone’s problems. Next week Greece is likely to pass a new austerity package. It will then get the next €12 billion ($17 billion) of its first €110 billion bail-out, which it needs by mid-July. Assuming the Europeans agree on a face-saving “voluntary” participation by private creditors to please the Germans, a second bail-out of some €100 billion will follow. This will keep the country afloat through 2013, when a permanent euro-zone bail-out fund, the European Stability Mechanism (ESM), will take effect. The euro will be saved and the world will applaud.

Time to stop kicking the can

That is the hope that the EU’s leaders, gathering in Brussels want to cling to. But their strategy of denial—refusing to accept that Greece cannot pay its debts—has become untenable, for three reasons.

First, the politics blocking a resolution of the euro crisis is becoming ever more toxic. Greeks see no relief at the end of their agonies. People are protesting daily in Syntagma Square against austerity. The government scraped through a vote of confidence this week; the main opposition party has committed itself to voting against the austerity plan next week and a few members of the ruling Socialist party are also doubtful about it. Meanwhile, German voters are aghast at the prospect of a second Greek bail-out, which they think would merely tip more money down the plughole of a country that is incapable either of repaying its debts or of reforming itself. As the climate gets more poisonous and elections approach in France, Germany and Greece itself, the risk of a disastrous accident—anything from a disorderly default to a currency break-up—is growing.

Second, the markets are convinced that muddling through cannot work. Spreads on Greek bonds over German bunds are eight points wider than a year ago. Traders know that Greece, whose debts are equivalent to around 160% of its GDP, is insolvent. Private investors are shying away from a place where default and devaluation seem imminent, giving the economy little chance of growing. The longer restructuring is put off, the more Greek debt will be owed to official lenders, whether other EU governments or the IMF—so the more taxpayers will eventually suffer.

The third objection to denial is that fears of contagion are growing, not receding. Early hopes that Greece alone might need a bail-out were dashed when Ireland and Portugal also sought help. The euro zone has tried to draw a line around these three relatively small economies. But the jitters of recent weeks have pushed Spain and even Italy back into the markets’ sights again. The belief that big euro-zone countries could be protected from attack has been disproved. Indeed, far from fears of contagion ebbing, the talk is of a Greek default as a “Lehman moment”: like the investment bank’s bankruptcy on 15th September 2008, it might unexpectedly bring down many others and devastate the world economy.

While the EU’s leaders are trying to deny the need for default, a rising chorus is taking the opposite line. Greece should embrace default, walk away from its debts, abandon the euro and bring back the drachma (in a similar way to Britain leaving the gold standard in 1931 or Argentina dumping its currency board in 2001).

That option would be ruinous, both for Greece and for the EU. Even if capital controls were brought in, some Greek banks would go bust. The new drachma would plummet, making Greece’s debt burden even more onerous. Inflation would take off as import prices shot up and Greece had to print money to finance its deficit. The benefit from a weaker currency would be small: Greece’s exports make up a small slice of GDP. The country would still need external finance, but who would lend to it? And the contagion risk would be bigger than from restructuring alone: if Greece left, why not Portugal or even Spain and Italy? If the euro zone were to break up it would put huge pressure on the single market.

The third way

There is an alternative, for which Shan Saeed is a strong advocate and has long argued: an orderly restructuring of Greece’s debts, halving their value to around 80% of GDP. It would hardly be a shock to the markets, which have long expected a default (an important difference from Lehman). The banks that still hold a big chunk of the bonds are in better shape to absorb losses today than they were last year. Even if Greece’s debts were cut in half, the net loss would still represent an absorbable proportion of most European banks’ capital.

An orderly restructuring would be risky. Doing it now would crystallise losses for banks and taxpayers across Europe. Nor would it, by itself, right Greece. The country’s economy is in deep recession and it is running a primary budget deficit (ie, before interest payments). Even if Greece restructures its debt and embraces the reforms demanded by the EU and IMF, it will need outside support for some years. That is bound to bring more fiscal-policy control from Brussels, turning the euro zone into a more politically integrated club. Even if that need not mean a superstate with its own finance ministry, the EU’s leaders have not started to explain the likely ramifications of all this to voters. But at least Greece and the markets would have a plan with a chance of working.

No matter what fictions they concoct this week, the euro zone’s leaders will sooner or later face a choice between three options: massive transfers to Greece that would infuriate other Europeans; a disorderly default that destabilises markets and threatens the European project; or an orderly debt restructuring. This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro. That option will not be available for much longer. Europe’s leaders must grab it while they can.

Source: Economist

What IMF & ECB should be doing for Greece--By Shan Saeed

INSTEAD of asking the question, "What to do with Greece?", one should instead ask the question “What policy regime should we implement with respect to insolvent countries?”. This would probably lead to improved answers to the first question.

The current policy regime is plagued by two taboos and one fiction. The two taboos: 1) The euro is not renegotiable; 2) A euro-zone country cannot formally default on its public debt. The fiction: there is no moral hazard problem.

In fact the moral hazard problem is huge. Vice is rewarded while virtue is punished. The International Monetary Fund (IMF) and European Union have created a pool of money to be tapped by those countries that most successfully put themselves in trouble. And the two taboos make it likely that more money will come to the table, once the initial manna is exhausted. Why should governments avoid taking over private debt if they know they can claim rescue money from their fellows? Equally, public sector unions would be foolish to accept pay cuts as long as their wages can be financed by benevolent tax payers from abroad.

To exit this conundrum, the two taboos must be overturned. A haircut must be imposed on debt holders, so as to make sure that in the future the possibility of default imposes market discipline upon sovereign states.

When a country defaults on its sovereign debt, it loses access to international capital markets for a while. Greece, Spain, and Portugal have a competitiveness problem. Their real exchange rates are overvalued and they are running large trade deficits. These deficits are financed by an inflow of capital (loans) from abroad. If Greece defaults, it will have much more trouble borrowing abroad and will no longer be able to finance large trade deficits. To restore its trade balance, its real exchange rate will have to depreciate. This means that Greek goods have to become cheaper and that Greek wages have to fall relative to the rest of the world. This painful medicine was traditionally administered by the IMF when it was rescuing a country: restoring a competitive exchange rate was one of the main aspects of IMF adjustment programmes [part of the Washington consensus]. The question is: how do you engineer a quick real depreciation when you are part of a currency union?

One possibility is to mimic its effect through tax policies. A fall in social security contributions matched by an increase in VAT would do the trick. But this requires high tax enforcement [which is notably weak in Greece] and can only go on as long as there are social security contributions left to be reduced. If this turns out to be too difficult, one could consider a return to the drachma with a flexible exchange rate regime. This will have the advantage of allowing for future depreciation when needed, if it turns out that Greece has an endemic tendency not to balance its accounts. With the drachma, there would be no drama.

Sources: Economist

Tuesday, June 28, 2011

Global economic outlook for 2011-2012 by Shan Saeed

The market looks shaky and investors nervous. I still remember working for a British bank and clients seeking my investment insight globally esp about US/ European/ME markets, precious metals, industrial and agriculture when the boom was happening...

In 2006, when the Dow was at 10,800, I called for it to go to 14,500. It hit 14,200. In the spring of 2008, I pulled our clients out of the market and called for a crazy year ahead, with several wild swings. I also called for collapse of Lehman Brothers to fall from 35 to near zero and AIG would require a bail out.....

I have made some nice currency calls recently. I called the 2009 dollar low to the day. I called the high in the euro at 151 – months before the first Greek crisis – as well as the drop to near 118. Both these times I hit the mark.

Some of the commodities calls include buying long-dated calls on gold stocks in October 2009, and exiting them when gold hit around $1,225. I went long again and held until around $1,440 months ago. Caught crude oil both ways... up into the $147.23 barrel high on july 11, 2008... And then I called the downside with a $97 target. However, it was $34/barrel in 2008. I shared about natural gas target of $2.40 when natural gas was trading around $7.

I have also made some interesting "non-market" calls. I predicted for the Fed Funds rate to go from 6% to under 1%. FED loose monetary policy of zero interest rate would continue till 2013. In the difficult fall of 2008, I called for economic strength to pick up beginning in March 2009. Commodities prices upsurge got the global economy out of recession.

Analysis about GOLD & SILVER.

I have caught many of the runs up and down, and I am standing aside now. I expect both to rally substantially over the next few years, following more weakness in the short term. My research currently shows a target for gold of $1700- 1800 or higher within two to two and a half years. Silver can return to $59 or higher.

Analysis about Stocks --Big Picture

I am looking for a turn down in the major indices. I initially thought last summer's decline was the start of this turn. But when the short-term cycles turned up last fall, I received a buy signal and went long stocks again in September.

I am looking at some of the weakness into the second half of the year 2011, followed by a rally before year end in 2011. I am looking for a much bigger decline over the next 24- to 30-month period in the major indices. The cycles show a major downturn going out about 2.5 years. The low I have calculated is 5,000 on the Dow Jones Industrial Average... indeed a significant low. This move to 5,000 will be interrupted by small bull and bear markets... But the trend is clearly down.

Forecast for Major Commodities like OIL, NATURAL GAS, COPPER AND AGRICULTURE

The longer-term picture for commodities is mixed. Many are up, but not all. However, I am bullish on agriculture commodities. In March of this year, I was interviewed in one of the TV Channels after oil charged over $100 per barrel. As I said then, I'm not in the camp of $150 to $200 per barrel for oil, as many people thought. My strategic analysis and research illustrate significantly higher targets for oil this year. IEA recent moves to supply oil in the market to kick start the global recovery make the oil outlook bearish and continue to be negative on crude as shared on the long term cycle I have shared with my clients recently. Crude is a commodity I have covered many times in the year, so keeping following my blog closely.

Natural gas is seen rising over the short-term. But longer term, I still see a move down to $1.70, which would be a significant low. I m bullish on copper and might touch $11,000/ton. I think copper is at a significant long-term top.

The agricultural grains are set for a multi-year up move in a few months. My research indicates that the bull market in grains/rice/soybean/corn will last into 2014.

Strategic Analysis about Dollar and Euro.

I recently predicted the recent rise for the euro, despite the conventional logic. So I don't view it as a short-term crisis. But over the long-term, I question the continued existence of the euro. Which country would exit Euro zone first remains to be seen. Greece is a big litmus test for European policy makers.

In the dollar, I see a bottom coming, which could hold for several years. US Dollar would stay weak bu 9-10% in 2011. US dollar is a bubble that would eventually bust.

Outlook for US Treasury

I actually see bond futures rallying into the third quarter. I recently caught the bond price rise by selling puts on 30-year Treasurys. And I intend to go long bonds soon until the fall. But over the longer term, I see a major rise in rates and a fall in bond prices until 2040. This is based on the cycle, which demonstrates that interest rates bottomed in 2010, topped in 1980, bottomed around 1950, topped around 1920, bottomed around 1890, and topped around 1860.

The bottoming of the cycle, which I am still experiencing now, is associated with deflation... And deflation is associated with low interest rates. But over the next 30 years of the cycle, rates will likely climb to a double-digit high like US economy had in the early 1980s.

IS QE3 imminent?

I do believe that QE3 would enter the financial landscape in 2011. There is still a problem with deflation, since already a double dip recession has emerged in the housing market, unemployment is rising again and even worse for the economy.


I have read economic history and we also do war and peace cycles. Cycles project the start of a major war around 2013, which is one of the reasons I am expecting the markets to come down. Civilizations move in predictable patterns, in a pendulum from one extreme to the other.

One interesting point is children will often vote right wing when their parents are left wing, and vice versa. This also happens in mass movements. Movements of violence alternate with movements of pacifism.

When governments cannot find answers for their problems, they often look for outside enemies to unite their people. These patterns are predictable by using the economic cycle analysis. I have studied these occurrences in history, am amazed at how things recur. I don't believe everything happens at random. So I analyzed the patterns in the cycles of war and peace. Once you identify them, you can predict the next time of conflict. Obviously, the system does not say where or how these will occur.

There is an interesting connection between this concept of predicting war and peace and the economic cycle I mentioned earlier. Therefore, we have no one to learn from, and history repeats itself.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK

Monday, June 27, 2011

Bank's capital requirement would lead to recession--By Shan Saeed

Is the global economy heading for recession?. By Shan Saeed

A recent recommendation for banks to set aside more capital to shield them from financial shocks will only throw the world back into recession. Global regulators working under the auspices of the Group of Governors and Heads of Supervision (GHOS) have proposed requiring banks to set aside extra capital to serve as a cushion, depending on the banks' size and systemic importance. These measures would avoid systematic and reputable risk for banks to go down...

Big banks will need to have 9.5 percent or even 10.5 percent tier 1 common equity ratios, if the proposal is adopted. Forcing banks to hike capital requirements will put those banks in a position to lend less in these challenging times. Banks are not lending at the moment in advance economies. More lending is needed to speed up global recovery, especially after the damage that money-printing stimulus measures and misguided regulatory policies have done to banks still reeling from the global recession. The legislators and regulators never understood what caused the financial crisis.

They have never acknowledged their part in facilitating the events that led to the crisis. Now having failed miserably in meeting their responsibilities on the way in to the crisis, they are perpetuating their mistakes by over-reacting by swinging in every direction without regard to the consequences.

U.S. bank regulators have said European financial institutions do need to exercise more constraint when cushioning themselves from risk. The stress testing system in Europe was weak and Ireland's bank failed that test miserably. All banks in europe were cleared in 2009 that they can withstand the global crisis ...

Stress test were not stringent enough to check the real stomach of the banks ability to see through these hard financial crisis. Just as troubling is that European banks continue to effectively set their own capital requirements using internal risk estimates, unconstrained by any objective hard limits. Tough times are coming fast for the bank's going forward.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK

Friday, June 24, 2011

FED would require QE3 in the coming months ---By Shan Saeed

Welcome back to investing without a safety net. I dont rule out the possibility that QE3 would enter into financial markets sooner than later. There are just six days left in the Federal Reserve's second round of quantitative easing, the Fed's effort to push billions of dollars into financial markets and prod the recovery forward.

But the $600 billion bond-buying spree, dubbed QE2, ends in the midst of a slowing economic recovery and worries about a European debt crisis. Unemployment remains stubbornly high, factory orders have slowed and gas prices have put a strain on consumer spending. Greece's debt troubles threaten to spread to other countries. And the stock market has given up two-thirds of the gains made earlier this year.
So will these troubles lead to a third round of bond buying? After all, QE2 has helped keep interest rates low and drive investors into stocks, setting off a rally that lasted until the end of April-2011

The Federal Reserve and its chairman Ben Bernanke have all but ruled out another round of bond buying. And in a recent Associated Press survey, 36 of 38 economists opposed any further effort by the Fed to spur growth. Many say QE3 could stoke higher inflation and provoke a political backlash. What's more, the central bank has already bought $2.8 trillion in mortgage and Treasury bonds and kept short-term interest rates near zero since 2008. Eventually, all those bonds will have to be sold back to the market. What would the Fed do for an encore? So why the whispers among investing bloggers, television pundits and doomsayer Nouriel Roubini that QE3 is a real possibility..Even Marc Faber/Jim Rogers are bearish on US dollar. So do I. Dollar would continue to stay weak in 2011/12.

Call it a big misunderstanding. When Bernanke formulated the road map for QE2 last August-2010, the S&P 500 was down 6 percent for the year. In the eight months that followed, the S&P 500 gained 28 percent. Bernanke himself has repeatedly pointed to the stock market's rise as a sign that quantitative easing worked. That's led some investors and pundits to believe that if stocks fall too far, the Fed will swoop in again. Most analysts earlier this month said many traders seem to expect just that. This view of the Fed as a stock market savior misinterprets the central bank's role.

The Fed has just two mandate/jobs. One is to prevent prices from rising or falling too fast. The other is to promote maximum employment. The central bank's main tool for plying its trade: interest rates. It raises rates to fight inflation and lowers them when prices are falling and unemployment seems high.

The idea behind the second round of quantitative easing was simple. Buying Treasurys would make borrowing cheaper and drive investors and banks out of low-yielding bonds and into other investments, like stocks. That, in turn, would create the sort of wealth effect that spurs spending, allowing companies to lift prices and start hiring again.

In the first few months after QE2 launched, that's exactly what happened. Stocks soared. Bond yields rose as investors sold them to the Fed. Americans started spending again and the unemployment rate began to decline. Prices, which had been in a long slide, began climbing. Then, starting in early May-2011, dour economic reports began pointing to a slowdown. The stock market rally hit a wall. That's when the chatter about a QE3 as a way to boost markets began.

If we are banking on the Fed to bail you out (as an investor), we are all set up for disaster. That's not the Fed's role. Economists, including Bernanke, say another bond-buying program could stoke higher inflation. Most importantly, the economy still looks much better than when the Fed launched QE2 last summer.

Nobody is talking about deflation as they were back then. Nobody is talking about a recession. But recession is a possibility. QE3 just isn't on the table.

Still, it could be a rough ride for markets after QE2 ends. Stocks may continue to edge lower until there's solid evidence of economic growth, like a sharp drop in unemployment. On Wednesday, Bernanke said he expected the pace of hiring to be painfully slow. What's more, trading is usually thin in the summer months. That makes it more likely that a wildcard event, such as Greece defaulting on its debts, could cause another steep sell-off. We might observe that we are going to have a rough summer, that's for sure.

Most economists believe that only the threat of falling prices and, to a lesser extent, many more months of weak hiring, would lead to another round of quantitative easing. Right now prices are on a steady climb, even with the recent dip in the cost of gas. The Consumer Price Index is now rising at a 3.6 percent annual pace, compared with 1.1 percent last summer. So-called core prices, which exclude food and energy, grew at a 1.5 percent annual rate in May. That's the highest rate since October 2008. Core prices bottomed out at a 0.6 percent annual rate last October, the lowest figure on record. The full benefits from the central bank's bond-buying have yet to be seen.

We're not really done with QE2 yet. Even after it spends the last of its $600 billion on Treasurys this month, the Fed will continue to invest the cash it gets from bonds coming due every month. And with the Fed keeping all the bonds it bought, the low borrowing rates available to banks may prod them to free up more cash for small business lending and other loans. The Fed can support growth without lifting a finger. US economy might be heading for Europe style crisis very soon.

Disclaimer: This is just a research piece and not an investment advice..Investors are encouraged to execute their own due diligence before entering into any financial contract or obligation. All financial transactions carry a RISK

Monday, June 20, 2011

Next stage of global financial crisis is starting now--By Shan Saeed

We're about to see a return to crisis-like conditions in the world's credit markets. This will devastate financial stocks. It should also hit commodity prices and commodity-related stocks hard. I'll share with you why I believe this would happen.

As longtime readers of global financial markets, in general, I try my best to teach my readers and savant investors something useful. I've always run my research work with a few simple principles in mind. Among them, I strive to provide my erudite investors with the information I would expect if our roles were reversed. Investors should know… abiding by this principle often requires me to share information with them before I can be 100% certain it's correct.

I want to share my analysis with my respected readers and send them warning signs as I can analyze them, right now. I want to guide you through my thinking process. And while I'll give you my predictions about what these things mean, I hope you'll realize that, as Yogi Berra famously said, predictions are tough – especially about the future.

The next stage in the ongoing global financial crisis will feature the collapse of both the Spanish and the Italian economies. This should occur within the next six months.

Ironically, the coming wave of financial trouble will probably force people back into U.S. dollars. Gold will also do well. In the currency markets, I believe the euro will collapse in the second half of this year, as will the Australian dollar, which serves as a proxy for the Chinese economy.

I expect this next "down leg" in the world's markets to be more severe than the crisis of 2008, because the balance sheets of the Western democracies are now less prepared to manage the losses. Finally, I believe the euro will be in a challenging position to stay alive..

The first thing I want to show you is the share price of UniCredit. You have probably never heard of UniCredit, but it is a major European bank, with significant operations in eastern and southern Europe. UniCredit is based in Italy. I've been keeping my eye on UniCredit for years, for reasons I'll explain below. UniCredit is the ultimate "canary in the coal mine" of the world's global currency system.

Most people don't know that UniCredit is the direct descendent of Oesterreichische Credit-Anstalt, the largest bank in Eastern Europe before World War II. Translated the name means: Imperial Royal Privileged Austrian Credit-Institute for Commerce and Industry. It was a Rothschild bank. The family founded it 1855, and it became one of the most important banks in Europe.

Credit-Anstalt held assets and took deposits from all over Europe. In 1931, the bank failed as a direct result of the U.S.'s Smoot-Hawley tariff. The act crippled Germany's economy and led French investors to redeem all the capital they'd lent to the bank. The failure of Credit-Anstalt caused Austria to abandon the gold standard, which set off a series of economic dominoes. Germany left gold… then Great Britain… and finally, in 1933, so did America.

The failure of Credit-Anstalt is what really kicked off the Great Depression. I have long been convinced the failure of its successor bank – now called UniCredit – would presage the next global monetary collapse.

I first began warning investors about UniCredit's likely collapse and its historic role in the world's monetary history back in March 2010. Since then, the bank's shares have grown weaker and weaker. And since March, the shares have fallen off a cliff, hitting lows not seen since March 2009. The sudden weakness in UniCredit's shares (down 21% in the last several weeks) indicates to me that big trouble is brewing in Europe. I don't believe efforts to stop the crisis in Greece will work. The austerity measures undertaken in Ireland, Spain, Italy, and Greece have severely weakened these economies, causing loan losses to banks like UniCredit.

And if there's a run on UniCredit (and I believe there will be), the losses will be too large for Italy to manage without a huge international bailout. UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem.

Another warning comes from a friend who is a senior executive at a major Wall Street bank. He sees more high-yield bond deals than just about anyone else in the world. He told our Atlas 400 group last weekend that credit markets around the world were suddenly shutting down. Yields were moving up. Spreads (the cost to borrow above the sovereign rate) were getting wider for the first time since March 2009.

Why? Because the market knows that the U.S. Federal Reserve is going to stop buying $85 billion-plus per month of U.S. Treasury debt. But the Treasury is going to continue to issue more debt. In total, 61% of the entire federal debt will mature within four years. That means roughly $10 trillion in U.S. Treasury bonds will have to be sold, plus whatever the total deficit adds up to over the next four years – maybe another $6 trillion.

It's difficult to imagine this amount of Treasury issuance won't have a big impact on the world's credit markets because these bonds always sell first and at the lowest yields. As these yields "back up" because of the large issuance, they should drain liquidity away from other issues, causing other bond prices to fall. This will reduce liquidity and make issuing debt more expensive across the credit spectrum.

Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment. In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment.

Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle. Jeremy Grantham, one of the world's most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world's economy, but it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal.

A massive increase in China's domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year.

With Europe's crisis heating back up, with credit tightening in the U.S. (thanks to the end of quantitative easing), and with China's boom unraveling… it's time to be extremely cautious. I don't know when it will start… but we're entering another period of soaring volatility, increasing interest rate spreads, and falling stock and bond prices. How the authorities deal with these problems will set the stage for what happens next. If they try to paper over these continuing crises again – with new money-printing programs from the Federal Reserve – you can expect a massive inflation and what I call The Inflation Filled American Economy

My best hope for more stability and a return to prosperity is for people to realize that bailing out banks doesn't solve these problems. It only makes them worse. But… I'm not optimistic.

Saturday, June 18, 2011

Debt ceiling is not the issue, cut down the spending in USA---By Shan Saeed

Headlines will soon shift from the sexcapades of Rep. Antony Weiner to the debate over the debt ceiling extension. The outcome of this debate could have a profound effect on the markets.

Here's what's at stake. The U.S. government is out of money and needs to borrow more by Aug. 2 to continue to function. The Treasury says it needs a $2 trillion increase in the previously imposed $14 trillion debt limit.

Republicans are holding out for meaningful spending cuts as a condition of the extension. But Treasury Secretary Timothy Geitner, President Barack Obama as well as China and two credit rating agencies are all warning of dire consequences if the debt limit isn't raised by the deadline.

They argue that by not increasing the debt limit, the government could be forced to default on its debt payments and such a default would wreak havoc in the financial markets by sending the dollar plummeting and interest rates skyrocketing. But, the risk of a short term technical default pales in comparison to the risks of not getting spending under more control.

The $2 trillion requested is in addition to the nearly $5 trillion of debt racked up in just the last two years. The national debt has already ballooned more than 55 percent since President Obama took office. Monthly deficits now approach the level of last decade's yearly deficits.

If the government doesn't stop the out of control spending, the U.S. economy could be destroyed. Hyperinflation and a plummeting dollar could doom the U.S. standard of living as we have known it. The wreckage could take decades to repair, if it can be repaired at all. US dollar has lost 50% of its value in the last 26 years against major currencies

While just about everyone claims to understand this problem, Democrats have displayed no intention of cutting spending and have resisted measures to cut spending at every turn. Only the leverage provided by the debt ceiling can force the issue and bring them to the table. Aside from preventing a longer-term disaster, meaningful spending cuts would benefit the economy and the markets in the near term as well.

The U.S. economy right now is like the stock of a company perceived to be going nowhere. Both domestically and abroad, the U.S. economy is viewed to have massive debt problems that government seems incapable of solving. Doing business in the United States is fraught with regulations, huge healthcare expenses and high taxes. The future seems to hold slow growth at best and financial disaster at worst.

Much better investment opportunities exist in the emerging markets, and that's where investments and jobs are going. In order to revive the economy, this commonly held view must be changed. Real spending reform now could tip critical mass in a positive direction.

It would signal to the world that the United States is getting serious about deficits and begin to change the current narrative. These spending reforms won't turn things around all by themselves but will have started down the road to recovery. Down this road the trillions in cash held by U.S. corporations may start to be put to work. Foreign companies might once again see the United States as a good prospect for the future. And, banks might begin to lend again.

An indication that the US government has the will to solve the current problems could quickly change the longer term perspective of the market. The outcome of this debate could determine if the last two years was a bear market rally or the beginning of a long-term bull market. This is an emergency and have no choice but to risk short term turbulence in order to avoid long term disaster. The US is headed for 100 miles per hour toward a brick wall and needed to turn the wheel and risk a fender-bender.

If there is a technical default at some point and it does result in a downgrade of U.S. debt and wreaks havoc in the markets, it will serve as just a small taste of what is to come if the US government don't get spending and deficits under control. Maybe being "scared straight" is exactly what American economy actually needs.

Disclaimer: This is a just a research piece and not an investment advice....

Friday, June 17, 2011

The New Gold Standard: Myths and Realities----By Shan Saeed

Its not surprising that US state of UTAH has declared Gold and Silver as official medium of exchange......

With various states debating measures to elevate the monetary status of gold, the gold standard is more politically relevant now than it has been in decades. When the LA Times (to pick just one example) runs an article stating matter-of-factly that "economists" uniformly oppose gold, you know the defenders of the current system are getting nervous.

Precisely because a gold standard is such a hot topic lately, it's important for people to understand its rationale. I will few facts with you to try to clear up a few misconceptions.

Do All Economists Oppose the Gold Standard?

I realize I am betraying my naïvete by admitting this, but I was very surprised at the depth of falsehood in the LA Times article mentioned above. Here is the blurb below the title, "Pushing for a Return to the Gold Standard":

The idea to make the precious metal legal tender has gained currency in more than a dozen state capitals, aided by Tea Party support and other efforts to rein in federal power. Economists say the plan would be disastrous.

I suppose the final sentence is technically true, but it's very misleading. It's a bit like saying, "Baskin-Robbins offers 31 flavors, but customers buy chocolate." Yes, some economists say a return to the gold standard would be disastrous, and I'd grant that perhaps even a large majority do. But the blurb above makes it sound as if virtually all economists oppose the move, which isn't true.

The writer in LA times, reinforces this misconception in two other places. He quite clearly tries to pit the rube businessmen and tea-party politicians against the professional economists. First he writes,

The ultimate goal is to return the nation to the gold standard, in which every dollar would be backed by a fixed amount of the precious metal. Economists of all stripes say the plan would be ruinous, but that view is of scant concern to Pitts [a South Carolina state representative].

"Quite frankly, I think that economists from universities are thinking within the confines of their own little world," Pitts said. "They don't deal with the real issues." (emphasis added)
Just to make sure the reader gets the point, Popper writes later in the article:

The United States and most of the rest of the world operated on a full gold standard until the Great Depression. Economists generally agree that the policy helped cause the depression and earlier severe downturns by limiting the amount of money the government could create, constraining its ability to stimulate the economy.

Scholars say moving to a gold standard now would be likely to slow the economy's already meager growth. Some are talking about sub-par growth which is happening in advance economies.....

"At some point someone may be crazy enough to try it, but they won't stay with it any more than they did in the past," said Allan Meltzer, a Carnegie Mellon University economics professor and a critic of the Fed's current monetary policy.

Given the lack of support from mainstream economists, activists have turned a few texts written by outsiders into their bibles, such as "Pieces of Eight," an out-of-print book by [constitutional lawyer] Vieira.

In the entire article, he doesn't quote a single economist who is in favor of the gold standard, or even paraphrase his or her views. This might be acceptable, except for the fact that quotes or makes reference to businessmen, politicians, and the lawyer Vieira. (I am not familiar with Vieira's work, and it should go without saying that I'm not criticizing him.)

Now, it would be easy for me to accuse the writer of lying, but for all I know he was so sure of the stupidity of the gold standard that he didn't even try to find actual PhD economists currently teaching at colleges (some even at top-20 graduate schools) who would have nice things to say about the gold standard. I personally know at least 20 such people, so believe me, they're out there if he or other journalists actually want to give the case for gold a fighting chance.

As far as books touting the advantages of the gold standard, yes indeed there are volumes written by people with PhDs in economics. A classic text is Ludwig von Mises's The Theory of Money and Credit, while a newer, much more reader-friendly selection is Murray Rothbard's What Has Government Done to Our Money? plus other books like on the Great Depression exploded the myth that the gold standard had something to do with it.

Did Gold Cause the Great Depression?

Before moving on, let me quickly address that particular claim. I've written a longer response here, but for now we have to wonder: If the gold standard caused the Great Depression, what else was going on? After all, the gold standard wasn't implemented in the 1920s. Although there had been plenty of industrial crises or financial panics in the previous hundred years, there had been no prolonged global depression approaching the experience of the 1930s — even as more and more countries joined the growing worldwide market of gold-based economies. So clearly it's not enough to point to the "golden fetters" of the monetary system to explain what happened in the Great Depression.

Thus, to blame the Great Depression on the gold standard is just as nonsensical as blaming it on the "laissez-faire" policies of Herbert Hoover, who (even if we take the caricature of him seriously) was no different from all his predecessors. It would be like explaining a particular airplane crash by citing gravity.

As a final point, let's not forget that FDR abandoned the gold standard in 1933. The Great Depression thus lingered on – after leaving the allegedly awful gold standard – for at least another 8 years (and I would say 13 years, because I think World War II "fixed" the economy), in what was still the worst economic period in US history. It's odd that the gold standard could wreak so much havoc in the early 1930s – even though it had never done anything comparable earlier in US history – and then could continue to "cause" the Great Depression, from 8 to 13 years after abandoning it. It starts to make you wonder whether the "economists of all stripes" know what they're talking about.

"You Can't Eat Gold!"

One of the most absurd objections to returning to a gold standard is that "You can't eat gold." I am not making this up; Dave Leonhardt of the New York Times actually said that to Ron Paul when he defended the idea on the Colbert Report.

Dr. Paul didn't really get a chance to answer (Colbert instead made a funny joke about idolatry), but it would have been delicious had he quickly asked the cynic, "Oh, so you make sandwiches out of Federal Reserve notes?" (We also would have accepted, "Oh, so I take it you are proposing a hamburger standard for the dollar?")

The utter absurdity of the objection – namely that you "can't eat gold" – is that gold actually is a useful commodity even for nonmonetary purposes. It's true, you can't eat gold, but you can wear it, you can fill cavities with it, and you can treat arthritis with it. In contrast, all you can do with fiat paper currency is use it in exchange, and you'd better not keep a large fraction of your wealth in actual paper dollars, since their purchasing power constantly erodes with the passage of time.

Don't Austrians Favor Market Choice?

Ironically, in addition to ill-informed critiques such as those emanating from the LA Times, the gold standard has critics from the purist libertarian camp. Such critics often ask, "What's so special about gold? Why do Ron Paul and so many other alleged fans of the free market favor the federal government telling us what the money should be?"

Of course Murray Rothbard – and as far as I know, every living Austrian economist – would prefer that money and banking were returned to the private sector, receiving neither special regulations nor privileges distinguishing them from any other industry. That means banks would be free to issue their own paper notes (backed by gold reserves) if they wanted, but if they issued too many and got caught in a "run," the government wouldn't declare a "bank holiday" and relieve the irresponsible institution of its contractual obligations.

What Rothbard and his modern followers believe is that gold almost certainly would be the free choice of individuals all over the world, if they were allowed to settle on a money without government legal-tender laws and other interventions stacking the deck.

In the meantime, given that there is a Federal Reserve (and other central banks), many Austrians (though here the agreement is not universal) believe that restoring the convertibility of the dollar to a fixed weight of gold would be a move in the right direction, even though it would still not be perfect.

The purpose of repegging the dollar to gold would be to remove what is euphemistically called "monetary policy" (a more sinister description would be "legalized counterfeiting") from politics and special-interest corruption as much as possible. People laud the current Fed as being "independent," but of course that is absurd. The Fed as it currently operates is clearly a cartelization device that shoves new money into the pockets of rich bankers, and that allows the government to finance massive deficits much more cheaply than would otherwise be possible.

"So You Want the Government to Set Prices?"

Related to the above criticism, some purists also ask, "Why don't you favor a market-driven price for the dollar and for gold? Just let supply and demand determine prices, not some rigid number picked out of a hat by the politicians."

This objection sounds plausible at first, but it too misses the mark. If the Fed were to say, "We are now announcing a new policy objective of maintaining the price of gold at $2,000 per ounce, from now until the end of time, and we will begin accumulating stockpiles of gold to reassure investors that we will be able to maintain the target," this would not be analogous to the federal government saying, "We are establishing a minimum price of labor at $7.25 per hour."

Under a genuine gold standard, when the Fed "sets" the dollar price of gold it isn't threatening people with fines or jail time if they want to trade gold at a different price. Rather, the Fed (or the government in general, if there were no central bank) would adjust the quantity of dollars in existence to maintain the target. If the forces of supply and demand were such that the market price of gold had drifted upward to, say, $2,025 per ounce, then the Fed (assuming a $2,000 target) would need to sell off some of its gold holdings,[1] which would (1) flood the market with more gold and (2) shrink the amount of dollars in the financial system. This contractionary policy would push down the price of gold toward the peg of $2,000.

On the other hand, nobody would be so foolish as to sell his gold for less than $2,000 per ounce, if the Fed (or the Treasury) had a standing invitation for anyone to trade in an ounce of gold in exchange for $2,000 in Federal Reserve notes. Why sell your gold to another private citizen for (say) $1,950 an ounce, when the US government stands prepared to buy unlimited quantities of gold at a fixed price of $2,000 per ounce?

Finally, a critic could (and actually did, on my blog) ask how this arrangement differs from the current one? After all, right now Bernanke "sets" interest rates, but not through literal price controls. Instead, the Fed adjusts the quantity of reserves in the banking sector such that the "market-determined" federal funds rate is close enough to the Fed's target for this interest rate. So isn't this basically the same thing as the gold standard, with a different "good" serving as the monetary commodity?

There are two problems with this sophisticated objection. First, in the current system the Fed has a moving federal-funds target. At best, then, it would be analogous only if the Federal Open Market Committee said after each meeting, "We are now setting the target price of gold at such-and-such dollars. However, if unemployment begins rising and core CPI is under 2 percent, we will begin raising the target price of gold in $10 increments over the next few meetings." That system would be nothing like the classical gold standard.

Yet the deeper problem with the analogy is that on a classical gold standard, the government is (imperfectly) mimicking what would happen if the money were actually gold, with people walking around with gold coins in their pockets, and merchants quoting prices not in dollars but in grains or ounces of gold. The classical gold standard, by fixing the dollar as convertible into a definite and constant weight of gold, doesn't introduce another price: the dollar is supposed to be a claim-ticket to gold. This isn't really "price fixing," any more than defining a foot as 12 inches is "central planning."

n contrast, what would be the free-market analog of the Fed's current strategy of targeting short-term interest rates? The only thing I can think of is if the money commodity in a community weren't something tangible like gold, silver, or tobacco, but rather overnight bonds issued by banks. Yet what is a bond but a promise to deliver money? So how could the money itself be a short-term bond? At this point I am dropping the analogy, lest I become permanently cross-eyed.


As the Fed's debasement of the currency reaches literally unprecedented levels, more and more regular Americans are waking up to the merits of commodity money. Yet this isn't some populist fad; there is a whole tradition of excellent academic scholarship touting the virtues of the gold standard. If he returns to the subject, I hope critics like the LA Times's Popper will give gold a fairer hearing

Disclaimer: This is just a research piece and not an investment advice..Investors are encouraged to execute their own due diligence before making any investment or entering into any financial contract or obligation. All financial transactions carry a RISK.

Wednesday, June 15, 2011

Marginal Productivity of Debt---By Shan Saeed

It is as simple as ABC if you analyze the balance sheet of any country and make a forecast. Its simple statistic that continues to warn of huge economic problems ahead for the US economy. Some economists call it the ‘marginal productivity of debt [MPD].’ It relates the change in the level of all debt (consumer, corporate, government etc.) in a country to the change in its gross domestic product (GDP). However, due to the message it is delivering, most US economists employed in financial institutions, governments and private industry, as well as financiers and politicians, want to simplify it or ignore it for some reasons.

And for the US economy and government finances, the MPD (and related variants of it) is continuing to indicate extremely difficult economic times ahead. Default cant be ruled out at this point of time. With QE2 finishing on June 30th and Debt ceiling $14.3 trillion yet to raised and deadline of August 2, is approaching fast, things are looking ominous...

I have vague recollections of the MPD concept from my economics classes two years ago. But I was re-introduced to it around 2010 by a renowned economist Nobel Laureate Prof Gary Becker at Uni. of Chicago, USA during my deliberation with him. I follow him and President Reagan economic adviser Milton Friedman. Another Nobel Laureate from Uni. of Chicago, Booth School of Business, USA

I wrote an article on my blog titled, Is the US heading for lost decades? and how debt productivity decline coming to a bad end? I found that, “for decades, each dollar of new debt has created increasingly less and less national income and economic activity. With this ‘debt productivity decline,’ new evidence suggests we could be near the end-game… ”

Another way of viewing the debt productivity problem is to look at it in terms of how many dollars of debt it took to help create total national income, which is the wages, salaries, profits, rents and interest income of everyone. Again, from my above mentioned article, i shared my analysis.

In 1957 there was $1.86 in debt for each dollar of net national income, but [by] 2006 there was $4.60 of debt for each dollar of national income – up 147 per cent. It also means this extra $2.74 of debt per dollar of national income produced zilch extra national income. In 2006 alone it took $6.32 of new debt to produce one dollar of national income.”

Such data helps explain why US exponential debt growth—after reaching certain limits—collapsed in 2008 and contributed massively to the global financial crash.

However, whereas the US private sector debt has marginally ‘de-leveraged’ (retrenched) since that crash (which might now be reversing), the US government, as everyone knows, has run up mammoth deficits to purportedly keep the country’s economy from imploding. Thus, the US’s MPD is marching to another, perhaps even more frightening tune, suggesting government financial insolvency and/or debt default.

One fascinating way of looking at the declining MPD of US government debt has just been presented by Rob Arnott on May 9, 2011, in his post, Does Unreal GDP Drive Our Policy Choices? What Mr. Arnott does is to subtract out the change in debt growth from GDP, and refers to this statistic as ‘Structural GDP.’ He finds that, “the real per capita Structural GDP, after subtracting the growth in public debt, remains 10 per cent below the 2007 peak, and is down 5 per cent in the past decade. Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.”

In its effort to counter the significant economic difficulties since 2008, the US government has added, or will have added, around $4 trillion in deficits (financed by new debt) in its three fiscal years 2009, 2010 and 2011. Yet, all this massive government deficit spending has failed to really ignite economic growth. Most likely this is because of the enormous dead weight loss of unproductive and onerous private sector debt, particularly that of consumer debt. Hence, real US GDP will have increased probably less than $1.5trn during these years. Including some further economic benefit in the years thereafter, a total GDP benefit of only about $2trn is probable.

So, $4trn borrowed for $2trn in GDP gains. Thus, in very rough round numbers, each new one dollar of US government debt might only produce $0.50 in new economic activity and probably only about $0.08 in new federal tax revenue. (Federal tax revenue as a percentage of GDP is around 15 per cent.) Therefore, the economic marginal return for each new dollar of US government debt is possibly around -50 per cent! If you loaned someone $10 million and they gave you back $5m, you would not be happy!

Hence, it might not be long before those holding or buying US government bonds perceive the reality that the US government, and US economy, are losing massively on government borrowings. This will result in much, much higher US government bond yields and interest costs. Most importantly, it may make the rollover of US debt and new debt issuance incredibly difficult unless either US taxes rise stratospherically to cover the deficits, and/or the US Federal Reserve money printing goes into hyper-drive to purchase the debt the markets will not buy. (Of course US banks, pension funds etc., could also be forced to buy them.) Thus, the idea that US government debt continues to be ‘risk-free’ is absurd. PIGS is a live case study in Europe to change that perception now. For this, and for many other reasons cited above, is why the US financial and political elites want to keep hush-hush about what the MPD and its variants reveal!

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any investment decision or entering into financial contract. All financial transactions carry a RISK

Monday, June 13, 2011

I am bullish on energy ---By Shan Saeed

Shared from Economist Magazine ...Proves my point why energy demand will continue to upsurge going forward....

GLOBAL oil production posted its biggest increase since 2004 last year but it was a relatively weak performer in a bumper year for energy growth, according to BP’s latest annual Statistical Review of World Energy. Although oil production grew by 2.2% in 2010, oil consumption grew by 3.1% and energy demand across the board shot ahead by 5.6%, the biggest annual gain since 1973.

Growth was above its long-term trend in every region of the world and almost every fuel reached record levels of use (see chart). Coal consumption grew by 7.6%; gas by 7.4%; hydroelectricity by 5.3%; other renewables by 15.5% (though from a titchy base). The only fuel not consumed at record levels was uranium: although nuclear power grew a little, it still fell short of its 2006 level, a high-water mark which, after the Fukushima disaster in Japan, looks set to stand for some time.

Mix Picture* Million tonnes of oil equivalent 2010
World Energy Consumption

Oil 4,028
Coal 3,556
Natural Gas 2,858
Hydro-electricity 776
Nuclear Energy 626
Renewals 159

Part of this is cyclical. As Christof Rühl, BP’s chief economist, notes, energy demand tends to fall faster than GDP when things go wrong, and grows faster when the situation improves. That is because energy responds to changes in investment, industrial production and transport, which rise and fall by more than the economy as a whole. This helps explain why energy consumption handily outstripped 2010’s 4.9% growth in global GDP. But there is also a structural change at work. Economic activity is growing faster in developing countries, in general less efficient energy users, than in developed ones. Even if global GDP were static, this shift would increase consumption.

Growth in developing countries is the main reason why coal consumption rose so much. The wealthy countries of the OECD still consume more oil than the rest of the world, but non-OECD countries use 69% of the world’s coal—two-thirds of that in China. This is a big part of the reason why energy-related carbon-dioxide emissions have been growing even faster than energy use. In 2010 they grew by 5.8%—the highest rate since 1969.

The fuel that gets people most excited, though, is natural gas. The boom in American shale gas—it now represents 23% of that country’s gas production, up from 4% five years ago—has kept the price low in America, inspired exploration for similar fields elsewhere and allowed liquefied natural gas (LNG) production originally intended to serve America to seek other markets. Over the past five years global production capacity for LNG has increased by 58% and its share of the international gas trade has risen from 23% to 31%, helping the world to shift towards more integrated and flexible markets: the average number of markets served by each gas exporter has risen from five to nine. An extrapolation of these trends published by the International Energy Agency on June 6th showed gas’s share of energy provision overtaking coal’s in less than 20 years.

*Sources BP

Tuesday, June 7, 2011

The chinese impact on the global inflation---By Shan Saeed


Here's a caveat. China’s structural inflation is going to begin negatively impacting the USA. They say the inflation dominos are falling as I speak and should translate to higher rates of inflation in the coming years in the USA: As China moves into a cycle of generating autonomous structural inflation, it is widely anticipated that China will export this inflation to the rest of the world. Here is how the dominos will fall.

The first domino is China creating autonomous structural inflation:

China attempts to rebalance economy away from investment/exports towards consumption. In March, inflation hit a 32-month high of 5.4% yoy. Policy makers remain well behind the curve. That domino has already fallen.

The second domino (in the process of falling) is proffered to be that China will then export this inflation to the rest of the world. This dynamic seems as inevitable as gravity itself.

The third domino is teetering.

Domestic inflation rising in China. Pace of Yuan appreciation stepping up in Q2-11.
Import price indices from China, for the developed economies, are turning up. Given the “stickiness” of supply, the world will remain a China “price-taker”. The past two decades of outsourcing that turned China into the world’s factory were long term trends. Manufacturing production cannot simply be transplanted quickly to another economy.

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 decision or entering into financial obligations/contracts. All financial transactions carry a RISK

Saturday, June 4, 2011

US is heading for recession in 2012---by Shan Saeed

Fed, Congress Can’t Stop Recession in ‘Miserable’ 2012 by Shan Saeed

The United States is headed for another recession as the Federal Reserve and Congress have no more tools left to keep the economy moving enough to avoid another slowdown.

The economy is due to cool off anyway, as the last recession began in 2007, and an end to money printing and stimulus spending will send the economy tanking anew.

I am curious that cutting the deficit means cutting final demand. It means the economy is going to slow. It might not be a bad thing to cut the deficit but unfortunately, when you cut the deficit, you’re going to get a recession — you’re going to get a slowdown. The more you cut the deficit, the worse it’s going to be.
I must say that next year is going to be truly miserable.

A recession will boost Republicans’ chances of taking back the White House in the 2012 elections, even if their spending-cut policies help throw the country back into recession. Furthermore, the Federal Reserve might try more quantitative easing (QE), where it prints money in hopes banks take that money and fuel economic growth, but such polices haven’t worked in the recent past and won’t work in the future.

I don’t think QE works very well because basically it puts money into the banks’ hands, and the banks aren’t lending it out. The banks are investing in markets and driving market prices up. QE is creating equity and housing bubble in the emerging economies esp China, driving up interest rates and inflation in those regions. Analyze China, Brazil, Korea, Thailand, Vietnam.

In other words, only the markets here and abroad benefit from quantitative easing, but not normal people. It is not putting money into the hands of the consumer or of the small-business man. Nevertheless, such a scenario will unveil a counter-intuitive trading opportunity: the U.S. dollar. US Dollar is a bubble that will eventually bust. Politicians will be forced to act and prep the economy for more long-term recovery.

The more troubling issue is the debt ceiling. The stronger the bond market will be and the stronger the dollar will be. I am referring to the $14.3 trillion government debt limit, which was recently broken and currently under analysis by lawmakers for an upward revision. And that is something obviously that’s going to really drive the dollar up. Europe can’t do anything, Europe is falling apart. US might be able to handle the austerity and for the long run.

Bond markets are showing that many market players feel darker times are around the corner thanks to continued high unemployment rates, weak housing prices and sluggish economic growth in general.


Housing Bubble
Private spending bubble

Future Bubble Warning

1. US Dollar is a bubble
2. US Debt is a bubble
3. Unemployment is a bubble

The yield on the benchmark 10-year Treasury note fell below 3 percent recently, the first time since December, on evidence the economic recovery is losing momentum — and losing it fast. It does look like US is heading for all these bubbles to be busted.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before entering into financial contract or obligations. All financial transactions carry a RISK......

Euro is still better than US Dollar ---By Shan Saeed

Euro Still Better Than the Dollar, Despite its Problems---by Shan Saeed

What I find funny about bull markets is they really do climb a wall of worry...If you read anything about the euro, all you hear are the negative things: The socialist governments in Europe, how all of the countries can’t get along and the PIIGS (Portugal, Italy, Ireland, Greece, Spain).

There are also a lot of good things about the euro and European union. I can share some interesting facts about EU. The common union and elimination of borders is great for travel and economic trade. In addition, Germany, the driver of Europe, wasn’t really all that affected by the economic crisis and is seeing near-record exports. If I were to analyze Germany and USA, there would be marked difference in the strategic approach to the economy.

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. This divergence created a natural experiment. Who was right?

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.

Results from one quarter do not settle the stimulus/austerity debate. Many other factors are in play. For example, Germany is surging, in part, because America is borrowing. Essentially, the Americans borrowed from everyone, spent some of that money on German machinery, and ended up employing German workers.

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.

The crucial issue is getting the fundamentals right. The Germans are doing better because during the past decade, they took care of their fundamentals and the Americans didn’t.

The situation can be expressed this way: German policy makers inherited a certain consensus-based economic model. That model has advantages. It fosters gradual innovation (of the sort useful in metallurgy). It also has disadvantages. It sometimes leads to rigidity and high unemployment.

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. As an editorial from the superb online think tank e21 reminds us, the Germans have recently reduced labor market regulation, increased wage flexibility and taken strong measures to balance budget

The European Union also doesn’t run a current account deficit, whereas the U.S. deficit is higher than PIIGS percent of GDP. In addition, because Europe has such huge, ridiculous welfare states it is going to be much easier for them to cut spending and get their deficits down.

Finally, Europe doesn’t have to pay for foreign ventures and being the policeman of the world like the United States. Therefore, don’t count out the euro. Despite of all the perceived problems, the euro has still climbed to $1.48 by year end. And I think in the long run it will continue to climb against the U.S. dollar.

Disclaimer: This is just a research piece. Investors are encouraged to execute their own due diligence before entering into any financial contract or obligation. All financial transacations carry a RISK....