Posts Tagged ‘USD’
By Masaki Kondo, Yoshiaki Nohara and Saburo Funabiki
Jun 19, 2011 8:50 PM GMT-0700
Japan’s biggest bond investors see increasing parallels between the nation’s government debt market and Treasuries, indicating that historically low yields in the U.S. have room to fall.
Just as in Japan, deposits at U.S. banks exceed loans, reaching a record $1.45 trillion last month, Federal Reserve data show. As recently as 2008, there were more loans than deposits. The gap is also at an all-time high in Japan, where banks use the money to buy bonds, helping keep yields the lowest in the world even though the country has more debt outstanding than America and a lower credit rating.
While none of the more than 40 economists surveyed by Bloomberg expect the U.S. will see two decades of stagnation like Japan, they are paring growth estimates as unemployment remains above 9 percent and the housing market struggles to recover. The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months on June 17, bolstering the appeal of fixed-income assets.
“I’ve seen what happened in Japan, so when looking at the U.S. now, I think, ‘Ah, the same thing is going on,’” said Akira Takei, the Tokyo-based general manager of the international fixed-income investment department at Mizuho Asset Management Co., which oversees about $41 billion.
In the decade before credit markets seized up in 2008, U.S. deposits exceeded loans by an average of about $100 billion, Fed data show. The worst recession since the 1930s led consumers to trim household debt to $13.3 trillion from the peak of $13.9 trillion in 2008, and increase savings to 4.9 percent of incomes from 1.7 percent in 2007, Fed and government data show.
Banks pared lending amid more than $2 trillion in losses and writedowns, according to data compiled by Bloomberg. Instead of making loans, financial institutions have put more cash into Treasuries and government-related debt, boosting holdings to $1.68 trillion from $1.08 trillion in early 2008, Fed data show.
Yields on 10-year Treasuries — the benchmark for everything from corporate bonds to mortgage rates — have fallen to less than 3 percent from the average of 6.79 percent over the past 30 years even though the amount of marketable U.S. government debt outstanding has risen to $9.26 trillion from $4.34 trillion in 2007, Treasury Department data show.
Ten-year yields fell 2.5 basis points, or 0.025 percentage point, last week to 2.94 percent in New York, the fifth straight weekly decline, according to Bloomberg Bond Trader prices. The price of the 3.125 percent security due in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 101 17/32.
Loans dropped and savings rose in Japan, too. Lending has declined 27 percent from the peak in March 1996, while bank holdings of government debt surged more than fivefold to a record 158.8 trillion yen ($1.98 trillion) in April, according to the Bank of Japan. The difference in deposits and loans, known domestically as the yotai gap, is 165 trillion yen, or more than Spain’s annual economic output.
Yields on Japanese bonds due in 10 years dropped to 1.115 percent last week from 3.46 percent in 1996 and have remained at about 2 percent or lower since 2000. U.S. and Japanese rates were little changed today as of 12:30 p.m. in Tokyo.
The U.S. and Japan are “beginning to look similar because of the fact that we’ve had very low interest rates for a very long time now” Charles Comiskey, the head of Treasury trading at Bank of Nova Scotia in New York, said in an interview. “This is going to be 10 years of pain to de-lever ourselves from the mess of a debt-ridden society that we’ve become.”
Futures traded on the Chicago Board of Exchange indicated in January that the Fed would raise its target rate for overnight loans between banks from a record low of zero to 0.25 percent in 2011. After reports this month showed that the jobless rate rose back above 9 percent, consumer confidence fell, the housing market weakened and manufacturing slowed, traders now see no increase until late 2012 at the earliest.
The IMF said the U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April.
Further declines in Treasury yields may be limited because the inflation rate is higher than in Japan, where consumer price changes have been mostly negative since 2000.
U.S. prices rose 3.6 percent in May from a year earlier, according to the Labor Department. That means 10-year Treasuries yield 62 basis points less than the inflation rate. So-called real yields in Japan, where consumer prices rose 0.3 percent in April, are a positive 82 basis points.
“Treasury bonds at the current valuation would likely disappoint long-term investors with low or even negative real returns,” Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., wrote in an e-mail to Bloomberg News. “The global economy seems more tilted to inflation than deflation over the next three to five years.”
Pimco, based in Newport Beach, California, had $1.28 trillion under management as of March 31, including the world’s biggest bond fund, the Total Return Fund. Bill Gross, the firm’s co-chief investment officer, has said mortgages, corporate bonds and sovereign debt of nations such as Canada are more attractive.
The median estimate of more than 50 economists and strategists surveyed by Bloomberg is for 10-year Treasury yields to rise to 4 percent over the next 12 months.
Weak Housing Market
Those forecasts fail to take into account the weak U.S. housing market, which makes up the bulk of Americans’ net worth, according to Akio Kato, the team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $31.1 billion Global Sovereign Open fund.
“U.S. home prices won’t rebound unless household debt” is reduced, Kato said. “As long as the situation remains the same, bank lending won’t grow. U.S. banks will tighten criteria for borrowers.”
House prices in 20 U.S. cities are 14 percent below the average of the past decade, according to the S&P/Case-Shiller index of property values. The gauge dropped in March to the lowest level since 2003. Japan’s land prices are still at less than half the level of two decades ago.
Japan has endured two decades of economic stagnation with nominal gross domestic product about the same as it was in 1991. Government debt is projected to reach 219 percent of GDP next year, the Organization for Economic Cooperation and Development estimates. That compares with about 59 percent in the U.S., government data show.
The economy has struggled to recover even though the BOJ buys government securities monthly to lower borrowing costs and stimulate the economy. The efforts have been nullified as banks use BOJ funds to buy bonds rather than lend.
“With no prospects for Japan’s economic growth, funds from the widening loan-deposit gap flow to bonds rather than stocks,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of the nation’s largest listed-bank.
That’s similar to the U.S., where economists are cutting growth forecasts even though the Fed has pumped almost $600 billion into the financial system since November by purchasing Treasuries under a policy known as quantitative easing. The program is due to end this week.
Mizuho’s Takei said there is a “very high chance” that lenders will continue to funnel deposits to the bond market, helping to push Treasury 10-year yields toward 2.4 percent within a few months. Takei said he favors longer-maturity securities.
“Eventually, yields in Japan and the U.S. will converge,” said Mizuho’s Takei. “This is just the beginning.”
Read the entire article HERE.
By Financial Mentor David Campbell
May 2, 2011
In the spirit of no investor left behind, let’s establish what a world reserve currency is:
A world reserve currency allows international bankers and governments to invoice trade and denominate foreign debt securities in a common currency.
The reason most business people in the world speak at least some English is because English and American dollars are the common language of world commerce. In simple terms, when Iran sells oil to Egypt, Egypt buys its oil using US Dollars. Even though the official currency of Egypt is the Egyptian pound and the official currency of Iran is the rial, the two countries conduct business in US dollars because they trust the value of the US dollar more than they trust the value of the other’s native currency. Both countries must have a stockpile of US dollars sitting around so they can send them back and forth to conduct trade with each other.
A world reserve currency is selected by the banking community for the strength and stability of the economy in which the currency is used.
Prior to WWI, the British pound sterling, the French franc and the German mark were used interchangeably in the world’s reserve currency market. A currency becomes less stable when the economy of the country issuing the currency becomes less dominant and bankers begin to abandon it for a currency issued by a more stable economy. After WWI, the German economy was weak and the American economy was strong so the German mark was replaced by the US dollar. After WWII, the British and French economies were weak and therefore the pound and franc were abandoned in favor of the US dollar. The victors of WWII formally discouraged the world from using the currency of Germany and Japan in international trade as an additional means of suppressing their formal rivals. After two consecutive world wars had ravaged the economies of Europe and Asia the United States dollar was in the right place at the right time to be adopted as the world’s reserve currency. Fortunately for America, it has been used as the primary unit of currency in international trade ever since. Having the ability to print the world’s currency is one of the major reasons why the United States enjoyed such unbridled prosperity since WWII.
On August 15, 1971, the United States unilaterally terminated the convertibility of the US dollar to gold when its president, Richard Nixon, gave an executive order without the approval of Congress or the American people.
This August will celebrate the fortieth anniversary of the most elaborate Ponzi scheme ever perpetuated. This means for the last forty years, America has been printing “counterfeit money” because our money is not backed by anything. Foreign countries have been sending things of tangible value such as food, energy, and labor to America where they receive a limitless supply of a counterfeit currency that is manufactured with the click of a mouse. America imports consumer goods and exports dollars and the world is tired of this unfair imbalance.
If the world stopped accepting the US dollar as the world reserve currency, the Ponzi scheme would come to screeching halt and the last forty years of American prosperity would be exposed for what it is: worldwide theft.
The Ponzi scheme has lasted this long because the whole world is in on the game. If you are a very large, old world nation, you are encouraged to print your own worthless currency and trade it for our worthless currency. If you are a small nation, America will send you a river of American dollars to buy your loyalty. If your country is neither big nor small and you are an emerging market with natural resources America wants, America will flex the muscle of its military to convince you to keep your mouth shut.
Brazil, Russia, India, and China (called BRIC) is the largest entity on the global stage. They are tired of the United States stealing from them by trading with a counterfeit currency and they have formed an economic coalition to find a solution. China is America’s largest lender and trading partner and they are worried America is about to default on its bar tab. China manufactures all of the iPads in the world and then trades them for counterfeit American dollars. If you were China, wouldn’t you be worried?
BRIC is leading a charge to abandon the US dollar as the world’s reserve currency. What does that mean for you? If BRIC chooses a reserve currency other than the US dollar, the rest of the world will probably follow. If the US dollar is not used as a medium of trade between other countries, those dollars will have no value to those countries and the dollars will be sent back to the US economy to buy anything they can. Imagine if the whole world suddenly decides to exchange their dollars for food, energy, labor, and real estate. When the whole world clamors to turn in their US dollars for something of tangible value, a massive influx of worthless dollars will flood the US economy causing tsunami like inflation. America is too deeply in debt to return to a sound money policy where dollars are backed by gold or anything else of intrinsic value. It is only a matter of time before the world abandons the US dollar as a reserve currency (probably replacing the US dollar with a new currency backed by BRIC). In the big scheme of world history, the US dollar has been the world’s dominant reserve currency for a very short time. It would be foolish and arrogant to think the US dollar would have world dominance forever.
I’ve been preaching about the inflation tsunami for the past two years and it is now upon us. The window of opportunity to prepare is about to run out.
Read the entire article HERE.
The Gold Report
The Gold Report: When the average investor turns on the news, even on financial channels, they hear that the U.S. economy is in the best shape it’s been in for three or four years. While the experts say the recovery is slower than anticipated, they expect its slow recovery will equate to a long, slow growth cycle similar to that after World War II. You have a contrary view.
Doug Casey: The only things that are doing well are the stock and bond markets. But the markets and the economy are totally different things—except, over a very long period of time, there’s no necessary correlation between the economy doing well and the market doing well. My view is that the market is as high as it is right now—with the Dow over 12,000—solely and entirely because the Federal Reserve has created trillions of dollars, as other central banks around the world have created trillions of their currency units. Those currency units have to go somewhere, and a lot of them have gone into the stock market.
As a general rule, I don’t believe in conspiracy theories and I don’t believe anything’s big enough to manipulate the market successfully over a long period. At the same time, the government recognizes that most people conflate the Dow with the economy, so it is directing money toward the market to keep it up. Of course, the government wants to keep it up for other reasons—not just because it thinks the economy rests on the psychology of the people, which is complete nonsense. Psychology is just about the most ephemeral thing on which you could possibly base an economy. It can blow away like a pile of feathers in a hurricane.
TGR: So, you’re saying we’re confusing the market’s performance with the economy’s performance?
DC: Yes. The fact is that the economy, itself, is doing very badly. The numbers are phonied up. I spend a lot of time in Argentina. Anybody with any sense knows you can’t believe the numbers coming out of the Argentinean Government Statistical Bureau, nor can you (any longer) believe the numbers that come out of Washington D.C. The inflation numbers consider only the things the government wants to look at and are artificially low. It’s the same with the unemployment numbers. None of these things is believable.
TGR: Isn’t the unemployment figure a lagging indicator of a rebounding economy?
DC: If you look at the way unemployment was computed until the early 1980s—something that John Williams from ShadowStats does—the numbers would indicate about 20% unemployment today. Besides, even while the population keeps rising, the number of people reported as actually working is level or even lower. Most indicators of the economic establishment, in my view, don’t really make any sense. GDP, for instance, includes government spending—much of which amounts to paying some people to dig ditches during the day and other people to fill in for them at night. So-called “defense” spending is almost totally wasted capital. The practice of economics today is pathetic and laughable.
TGR: So, the economy is not rebounding?
DC: No. My take on this is that we entered what I call the “Greater Depression” in 2007. And now, because the government has printed up trillions of dollars in the last couple of years, we’re in the eye of the hurricane. We’ve only gone through the leading edge of the storm. People think this will just be another cyclical recovery like all the others since WW II. But it’s not. It’s going to wind up with the currency being destroyed. It’s going to be a disaster. . .a worldwide catastrophe.
TGR: You indicated that the government is using these mass infusions of made-up money to prop up the stock market due to the psychological factor—that people will think the economy’s doing well because the market is doing well. However, we hear that a lot of that money has been caught up in the banks. Would you comment on that?
DC: As I said, that money has to go somewhere. The banks have been borrowing from the Fed at something like 0.5% and investing it in government securities at 2%, 3% or 4%, depending on the maturity. So, much of that money has been a direct gift to the banks; and they’re basically making an arbitrage spread of 2%–4%. So, yes, that’s happening with some of the money. Still, it doesn’t all just sit in these Treasury securities. A great deal of it, inevitably, goes into the stock market.
TGR: You also said that psychology isn’t the only reason the government wants to see the stock market go higher.
DC: Right. Pension funds have a great deal of their assets in stocks. Certainly, many funds run by government entities, such as the state and city employee pension funds, are approaching bankruptcy despite the fact that the Fed has driven interest rates to historic lows, artificially pumping up both stocks and bonds. And, I might add, keeping property prices higher than they would be otherwise. When interest rates rise eventually—and they will go up a lot—it’ll be something to behold in the markets.
TGR: You mentioned John Williams who’s in your speaker lineup for the Casey Research Summit, The Next Few Years. Another of your speakers is Stansberry Associates Founder Porter Stansberry, who’s been making two points about the devaluation of the U.S. dollar. One point he makes in his The End of America video concerns the quantitative easing (QE) you mentioned—those trillions of dollars. But Porter also anticipates the U.S. government announcing a devaluation of the currency similar to what England did in 1970. Do you see that type of scenario occurring, as well?
DC: When the U.S. government last officially devalued the dollar in August 1971, it had been fixed to $35 per ounce to gold. In other words, before that, any foreign government could take the dollars it owned and trade them in at the Treasury for gold. Nixon devalued the dollar by raising it to $38/oz., and then to $42/oz. It was completely academic, anyway, because he wouldn’t redeem gold from the Treasury at any price.
But because the dollar isn’t fixed against anything now, the government can’t officially devalue it. It’s a floating market. The government’s going to devalue the dollar by printing more of the damn things and letting them lose value gradually—actually the loss will no longer be gradual, but quite fast from here on out. But it’s not going to do so formally by re-fixing the dollar against some other currency or against gold. I’m not sure Porter’s phrasing it in the best way, but he’s quite correct in his conclusion and his prescriptions as to how to profit from it. At this point, the dollar is nothing more than a floating abstraction, an IOU nothing on the part of a manifestly bankrupt government.
TGR: Another abstraction is the fact that the Treasury says the money it is printing has a multiplier effect when it gets into the U.S. economy, so it can pull those dollars back when the time comes. Is that a viable alternative to offset the devaluation caused by printing more money?
DC: You have to look first at the immediate and direct effects of what the government’s doing, and then at the delayed and indirect effects. And sure, just as it’s injecting all this money into the economy—mainly by the Fed buying U.S. government bonds—theoretically, it can take it out of the economy by doing the opposite. But I just don’t see that happening.
TGR: Why not?
DC: One of the reasons is that the U.S. government, itself, is running annual trillion-dollar deficits as far as the eye can see. I think those deficits will go higher—not lower. So, where’s that money going to come from? Where will it get trillions of dollars to fund the U.S. government every year?
China isn’t going to buy this paper and Japan will be selling its U.S. government paper because, if nothing else, it’ll need to buy things to redo the northeast part of the country. Nobody else is going to buy that trillion-dollar deficit either, so it’ll have to be the Federal Reserve. In fact, the Fed will have to buy much more and, therefore, create more money. That’s what happens.
TGR: This currency crisis isn’t unique to the U.S. You just brought up Japan. And aren’t all the European countries doing the same thing?
DC: The U.S., unfortunately, is not unique. This is going to be a worldwide catastrophe. It’s been a disaster for every country that’s done this in the past—Zimbabwe, Germany, Hungary, Yugoslavia and countries in South America—but those were within only those particular countries. In most of those cases, people never trusted their governments; so, they had significant assets outside the country in a form other than the local currency. The problem now is that the U.S. dollar is the world’s currency and all of these central banks own USDs as the backing for their own currencies. All these other countries will wind up finding that they don’t have any assets after all. That’s going to happen all over the world.
TGR: With countries around the globe facing the same issue, should anyone hold currencies?
DC: No. Sure, you need local currency to go to the store and buy a loaf of bread. But for liquid assets you’re trying to save, it’s insane to own currencies at this point because they’re all going to reach their intrinsic value. I’ve been recommending for many years that people buy gold and own gold for their savings—serious capital they want to put aside in liquid form. With gold now over $1,500/oz. and silver at $48, people who followed that advice have made a lot of money. That’s the good news. The bad news is that very few people have done so. Newbies to the game are paying $1,500/oz. for gold. It’s going higher, but it’s no longer the bargain that it was. The important thing to remember, though, is that gold is the only financial asset that’s not simultaneously someone else’s liability. That’s why it’s always been used as money and why it’s likely to be reinstituted as money.
TGR: From your viewpoint, how does a person with any wealth preserve it during this tumultuous period other than by investing in gold?
DC: Frankly, I don’t know. I own beef and dairy cattle, which are a good place to be; but that’s a business, and it’s not practical for most people. I think it boils down to gold.
TGR: But what investments should they be looking at these days?
DC: There really aren’t investments anymore. With trillions of newly created currency units floating around the world, things will become very chaotic and unpredictable shortly. It’s very hard to invest using any kind of Graham-and-Dodd methodology when things are that chaotic. Whether you like it or not, you’re going to be forced to be a speculator in the years to come. A speculator is somebody who tries to capitalize on politically caused distortions in the marketplace. There wouldn’t be many speculators, or many of those distortions in the marketplace, if we lived in a free-market society. But we don’t.
TGR: So, speculation will supplant value investing?
DC: Well, investing is best defined as allocating capital in a way that it reliably produces more capital. The government is going to make that quite hard in the years to come with much higher taxes, much higher inflation and draconian regulations. You will actually be forced to speculate. That’s a pity, from the point of view of the economy as a whole. But I kind of like it, in a way. Few people know how to be speculators, so I should be able to make a huge amount of money in the next few years. Unfortunately, it’ll be at a time when most people are losing their shirts. But I don’t make the rules. I just play the game.
TGR: As you look over the next year or two with your speculator hat on, what sectors do you expect to experience the most distortion and, therefore, offer the most opportunity for the speculator?
DC: One sure bet is the collapse of the U.S. dollar. Always bet against the USD and you’ll be on the winning side of the trade. A very direct way to make that bet is by shorting long-term U.S. government bonds because, eventually, interest rates will go to the moon, which means bond prices will collapse.
You can also look at the precious metals because, at some point, when people panic into them, their price curves will go parabolic. Mining stocks are likely to draw a lot of money, so they could go wild as they have many times over the last 40 years.
TGR: Your summit has presentations scheduled on silver, gold, currencies, Asia, real estate, agriculture and even more. What do you expect to be the major takeaway this time?
DC: What we’re facing now is something of absolutely historic importance—the biggest thing that’s gone on in the world since the industrial revolution. Many things will be completely overturned in the years to come. What’s happening now in the Arab world, with all of these corrupt kleptocracies being challenged and overthrown, is just the beginning. We haven’t seen the end of this in any of these countries—Tunisia, Egypt, Syria, Algeria. Of course, Saudi Arabia will be the big one. Everything’s going to be overturned. And all these stooges that the U.S. government has been supporting for years could very well lose their heads. It’s going to be the most tumultuous decade for hundreds of years, bigger than what happened in the 1930s and 1940s.
TGR: Any last things you’d like to tell our readers?
DC: Yeah. Hold on to your hats. You’re in for a wild ride.
Read the entire article HERE.
by Nick Olivari
NEW YORK | Fri Apr 29, 2011 4:34pm EDT
By contrast European Central Bank has raised rates, boosting the euro by 11 percent so far this year.
The U.S. dollar index .DXY hit a three-year low of 72.834 on Friday and has now fallen for five straight months, with April posting a 3.8 percent April decline.
“It’s pretty close to a one-way bet (on the dollar), but in foreign exchange markets, anything can happen,” said Chris Turner, head of foreign exchange strategy at ING Commercial Banking in London. “U.S. monetary policy is reflationary policy which is great news for the commodity currencies and frames the weak dollar.”
The euro rose about 4.6 percent against the dollar in April for its best month since September. The dollar fell 2.5 percent this month against the yen, its worst month since December.
On Friday the euro was buoyed by stronger-than-expected euro-zone inflation data that increased the chance of another ECB rate rise. Trading was thinned by a holiday in the U.K. for Britain’s royal wedding.
The euro closed around $1.4816, little changed on the day but still near its highest since early December 2009.
The U.S. Labor Department will publish its April employment report next week, and analysts at Citigroup said dollar bearishness should persist.
“It is hard to be optimistic on the (dollar’s) long-term prospects, given the Fed’s ability to surprise on the dovish side, the ongoing overhang of U.S. dollar assets among reserve managers and the concerns that have emerged on long-term U.S. fiscal prospects,” CitiFX said in a research note.
Overextended speculative positioning suggest the dollar’s decline may slow next week, according to Vassili Serebriakov, currency strategist at Wells Fargo in New York.
“However, with the Fed sending a strong dovish message, we see few significant triggers for an immediate dollar turnaround,” he said.
The Swiss franc was buoyed by upbeat comments from the Swiss National Bank’s chairman and an above-forecast Swiss sentiment survey.
The Swiss franc rose to hit a record high of 0.86256 francs per dollar on EBS. Speculators remained net long the Swiss franc to the tune of 17,841 contracts, according to CFTC data. The euro ended the week down about 1.0 percent at 1.2820 francs.
Against the yen, the dollar was down 0.6 percent at 81.07 yen. The net short yen position dropped by 15,986 contracts to 36,997 from 52,983 the week before, according to CFTC data. Most of the shift was from a decline of 14,858 total short contracts to 51,060 contracts.
Euro resistance was expected around $1.4905, the peak in December 7 2009, with a substantial options barrier at $1.5000. Beyond $1.5000, the key target was the 2009 high of $1.5145, analysts said.
One-month euro/dollar risk reversals last traded at -1.3 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise.
But the same measure traded at -1.48 on Tuesday, which indicates relatively less bearishness, the day before Federal Reserve Chairman Ben Bernanke hosted his first-ever post-policy decision news conference.
Still, euro long positions rose to 68,279 contracts in the latest week, the highest since December, 2007, according to data from the Commodity Futures Trading Commission released on Friday.
(Reporting by Nick Olivari)
Read the entire article HERE.
by Graham Summers
Phoenix Capital Research
04/20/2011 09:33 -0400
In case you missed it, earlier this week China announced that its foreign currency reserves are excessive and that they need to return to “reasonable” levels.
In politician speak, this is a clear, “we are sick of the US Dollar and will be taking steps to lower our holdings.” Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).
This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months.
In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets. This is the beginning of the US Dollar’s end as world reserve currency.
The dimwits in Washington don’t understand this because their advisors are all Wall Street stooges who don’t think debt or deficits matter. After all, why would they? Their entire business model is now based on endless cheap debt from the US Fed. So it’s only logically (in their minds) that the US as a sovereign state engage in the same strategies.
What does this mean? We’re on out own in terms of preparing for what’s coming. The US Dollar has already taken out its 2009 low in the overnight futures session. We now have only one line of support before the US Dollar breaks into the abyss (all time lows).
So if you’re not preparing for mega-inflation already, you need to start doing so NOW. The Fed WILL continue to pump money into the system 24/7 and it’s going to result in the death of the US Dollar.
Read the entire article HERE.
By Doug Casey
Chairman, Casey Research
Monday, April 18, 2011
A meme is now circulating that gold is in a bubble and that it’s time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one.
As you listen to the current blather from talking heads about where gold is going, keep in mind most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations.
You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.
So let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.
“Gold is expensive.”
This objection is worth considering – for any asset. In fact, it’s critical. We can determine the price of almost anything fairly easily today, but figuring out its value is as hard as it’s ever been. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 – but that official number is meaningless, since nobody buys or sells the metal at that price.
(More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.)
Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold.
Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence. It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.
“Gold is risky.”
Risk is largely a function of price. And as a general rule, the higher the price, the higher the risk, simply because the supply is likely to go up and the demand to go down – leading to a lower price. So yes, gold is riskier now, at $1,400, than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.
In any event, risk is relative. Stocks are very risky today. Bonds are ultra risky. Real estate is in an ongoing bear market. And the dollar is on its way to reaching its intrinsic value.
Yes, gold is risky at $1,400. But it is actually less risky than most alternatives.
“High gold prices will bring on huge new production, which will depress its price.”
This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 82.6 million ounces per year and has been trending slightly down for the last decade. That’s partly because at high prices, miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production.
But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper. Its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things – new production is a trivial influence.
That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold. Space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists’ dream. Perhaps someday this will be economic for gold. And nanotech may soon allow ultra-low-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters in the course of this bull market.
“Gold sentiment is at an all-time high.”
Although gold prices are at an all-time high in nominal terms, they are still nowhere near their highs in real terms – of about $2,500 (depending on how much credibility you give the government’s CPI numbers) – reached in 1980. Gold sentiment is still quite subdued among the public. Most of them barely know it even exists.
Some journalists like to point out that since there are a few (five, perhaps) gold dispensing machines in the world, including one in the U.S., there’s a gold mania afoot. That’s ridiculous, although it shows a slowly awakening interest among people with assets.
Journalists also point to the numerous ads on late-night TV offering to buy old gold jewelry (generally at around a 50% discount from its metal value) as a sign of a gold bubble. But this is even more ridiculous, since the ads are inducing the unsophisticated, cash-strapped booboisie to sell the metal, not buy it.
You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point.
These are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools, or the uninformed.
The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they’re done, I suggest you be right and sit tight.
Editor’s note: Doug Casey, chairman of Casey Research, is a best – selling author, international investor, and entrepreneur. He travels the world looking for the best real estate and natural resource investments. His work is required reading here at DailyWealth.
Each month, Doug and his team provide subscribers of The Casey Report with the kind of investment analysis you won’t read anywhere else in the world. We think one good rant from Doug is worth twice the subscription price. Click here to learn more about The Casey Report.
By Chris Puplava
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
While most investors are familiar with the Dollar Index, it is actually a poor tool in gauging the strength of the USD given its weightings and only being a six currency basket. To truly see how the greenback is performing on a global scale one needs to look at more than six currencies and include precious metals. When one does this it is truly amazing how much the purchasing power of the USD has declined since 2009 after two rounds of quantitative easing (QE), and it is this loss of purchasing power that has the potential to at least cause another growth scare like 2010 or even a bear market.
The Biggest Loser
As I pointed out in a recent article, the USD Index has broken a three year trend line, which largely resembles a similar setup in the 1970s. When that break occurred stocks suffered in real terms and commodities went screaming higher with gold advancing more than 350% in two years. Whenever the USD Index has approached this 3-year trend line support I take a look at how it is performing versus world currencies over different time periods to see if it is beginning to strengthen and indicate a change in trend.
What you see below is the USD versus 30 world currencies and 4 precious metals over 6 different time periods. If the USD was in the process of staging an intermediate bottom you would begin to see more and more currencies and precious metals declining relative to the USD on a short term basis (1 day, 5 day, 1 month) but we simply aren’t seeing that. Shown below, only 8 currencies/metals are declining relative to the USD yesterday and over the 5 day , 1 month, and 3 month horizons, the USD is still declining against 2/3 of the currencies below.
Stepping back just a bit further in time we can see that the USD has lost a great deal of its purchasing power from a global perspective, particularly versus precious metals. Since 2009 and after two rounds of quantitative easing the USD has declined more than 75% versus palladium, 69% versus silver, and 39% versus gold. The USD has also lost a great deal of purchasing power versus commodity currencies like the Australian Dollar, Brazilian Real, and Canadian Dollar. Clearly, when looking at the USD from a global perspective, cash has been trash thanks to Helicopter Ben Bernanke and a Congress and President that have extended U.S. debt to the stratosphere.
What a Weak USD Means to You
Given the U.S. economy is now primarily a service economy by exporting its manufacturing base overseas, it is important to keep in mind that we are far more susceptible to import inflation. Thus, one of the major trend components in import inflation is the USD as commodities are priced in dollars. Shown below is the inflation rate for import prices (blue line) along side the annual rate of change in the USD Trade-Weighted Index (orange line—shown inverted for directional similarity and advanced several months). The close relationship between the USD and import price inflation could not be more clear with the recent weakness in the USD hinting at even higher import prices in the months ahead. This is certainly not going to be good news to consumers already struggling with high food and energy prices.
What a Weak USD Means to Corporations
One of the things I argued for as to why there was still pain ahead in the middle of 2008 was the extremely high level of corporate profits relative to their normalized levels (“The Worst Is Yet to Come”). Essentially, corporate profit margins tend to reverse and move back towards the long run average, and we were still well above historical norms back in the summer of 2008—a strong reason for why I was not ready to turn bullish on the markets.
Yet again, the extreme in corporate profits is causing me to turn more cautious on the economy and stock market as the drivers that helped corporations boost their margins (shedding payrolls while sales recovered) is largely behind us as payrolls are now being added again. Additionally, while inflation was quite tame in 2009 and for most of 2010 it is picking up momentum and a weak USD ahead will only exacerbate the problem. Shown below are current corporate profits relative to normalized levels (historical average times Gross Domestic Product), which imply significant downside risk for the earnings seasons ahead. As of the end of last year, corporate profit margins were more than two standard deviations above normalized levels (see red line in second chart below), with 2007 representing the last time this occurred.
What a Weak USD Means to the Economy & Stock Market
The current rising inflationary pressures we are seeing are coming from the 15% decline seen in the USD Index since last summer, and further USD weakness ahead will only compound the problem. Higher inflation cuts into corporate profit margins as well as reduces consumer’s discretionary spending levels as they are forced to pay more for less. Inflation levels are leading economic indicators as it takes time for consumers to respond from ticker shock and change their spending habits, and current inflationary trends portend a decelerating shift for the economy ahead.
Seen below are three different Federal Reserve regional surveys with both the headline index and the price index for the surveys shown together, with the price index shown inverted for directional similarity and advanced owing to their leading tendencies. As you can see all three price indexes (red lines) haved moved sharply higher (lower in chart since inverted) and indicate we are likely to see lower national ISM and regional ISM numbers ahead.
Why is this important to you as an investor? Well, there is a strong correlation between the ISM numbers and the year-over-year rate of change in the S&P 500 as seen below. Given the price indices for regional ISM’s are forecasting lower headline ISM numbers in the months ahead, we can also expect the stock market to be at risk with flat to negative returns. That said, with QE 2 still in force the price weakness forecasted by the regional ISM price indexes may have to wait until QE 2 comes to a close in June.
Source: ISM, Standard & Poor’s
What Does it All Mean?
The last time we were in a similar scenario was late 2007 to early 2008. While I am not forecasting another crash like the one seen in late 2008, I do believe we can see the same trends. What were the characteristics of that time period? A weak USD, rising inflationary pressures, lower retail sales, lower corporate profit margins, and outperformance by commodities in general and precious metals in particular. If the USD accelerates its current decline then commodity based investments would be the most likely beneficiaries. Additionally, defensive sectors like consumer staples, health care, utilities, and telecommunications will likely outperform the more cyclical sectors such as technology, consumer discretionary, and financials.
Read the entire article HERE.
by Chris Marchese
Wednesday, February 2, 2011
The financial markets were primarily concerned with the possibility of price deflation when the financial crisis began in 2008. The Federal Reserve System (the Fed) responded to the possibility of price deflation by taking unprecedented actions. These actions have created the potential for a dangerous increase in the money supply. Now the Fed is caught between a rock and hard place. The Fed’s conventional methods of alleviating the problem will severely hamper economic recovery. To grasp the severity of this problem, we must first examine money, fractional reserve banking, and the Federal Reserve System. Then we can move on to outline a remedy.[i]
The Money Supply
Money is the general medium of exchange. It is the most marketable good. People accept money because they believe it can be easily sold in exchange for other goods. Therefore, the money supply should include everything that can be used as a general medium of exchange. The Fed publishes several measures of the money supply. Unfortunately, the Fed does not publish a perfect measure of the money supply. With this in mind, we will use MZM (Money Zero Maturity) as our measure of the money supply. This measure conforms most closely to our rule above, where the money supply includes anything that can be used as a general medium of exchange.[ii] We shall refer to MZM minus the currency component as just demand deposits for simplicity.
Fractional Reserve Banking
Bank reserves are the amount of money a bank keeps on hand for instant redemption. Suppose a bank has $50,000 of demand deposits (checking accounts). These demand deposits can be redeemed by the customer at any time. If the bank keeps all $50,000 in its vault, then the reserve ratio is 100%. However, if the bank lends out the $50,000 to another customer, then the bank now has $100,000 of demand deposits backed by only $50,000 of reserves. The reserve ratio in this case has fallen to 50%. This is called fractional reserve banking because the bank only has a fraction of their deposits covered by reserves. In the United States, the legal reserve ratio at commercial banks is 10%.[iii] In the example above, the bank can legally have $500,000 of demand deposits with just $50,000 of reserves. The bank can achieve $500,000 of demand deposits by making loans. When a bank makes a loan, they do so by simply creating a demand deposit for the amount of the loan. Since demand deposits are money, banks create money when they make loans. Fractional reserve banking is inherently unstable. Firms should arrange their affairs so the time structure of their assets is shorter than the time structure of their liabilities. For example, suppose Mr. A owes Mr. B $1,000. In addition, Mr. C owes Mr. A $1,000. Mr. A should arrange his affairs so Mr. C pays him before he must pay Mr. B.
However, the time structure of a fractional reserve bank’s assets (its loans) is always longer than the time structure of its liabilities (its demand deposits). Demand deposits are due instantly, so it is impossible for a fractional reserve bank to arrange its affairs accordingly. This is equivalent to Mr. A owing Mr. B $1,000 on demand, while Mr. C owes Mr. A $1,000 five years from now. Consequently, fractional reserve banks are always in a state of inherent bankruptcy. A fractional reserve bank can never satisfy all their customers’ redemption demands simultaneously.
In short, fractional reserve banking systems are highly unstable and susceptible to collapse.[iv]
The Federal Reserve System
It is possible for governments to control the money supply through a central bank. The Federal Reserve System is the central bank of the United States. The Fed is the banker’s bank, where commercial banks deposit their reserves at the Fed. The Fed also acts as a cartelizing device to combat the instability inherent in our fractional reserve banking system. The Fed coordinates the fractional reserve banking process and acts as a lender of last resort.The Fed can influence the financial markets and economic activity by manipulating the money supply. The Fed exercises considerable influence over the money supply by controlling the level of reserves.
The following equation simplifies the process by which the Fed increases the money supply through changes in the levels of reserves. D is the level of demand deposits, r is the reserve ratio, and R is the level of reserves.[v]
Change in D = 1/r x Change in R
The Fed can directly control the level of reserves, and hence indirectly control the money supply, by engaging in open market operations. Open market operations entail the purchase or sale of government securities in the open market. The Fed purchases securities when they wish to increase the money supply. This operation increases the level of reserves. The new reserves are then multiplied through the banking system and the level of demand deposits increases.On the other hand, the Fed sells securities when they wish to contract the money supply. This pulls reserves out of the system and thereby reduces the level of demand deposits. To demonstrate this process, suppose the Fed wishes to increase the money supply by $1,000,000. The Fed will go into the open market and purchase $100,000 of securities. The Fed pays by writing out a check to the seller.[vi] Now the person or institution deposits this check at their bank. This bank now has excess reserves of $100,000. This bank does not expand its loans by 10:1. Instead, the bank expands by 1 minus the legal reserve requirement of 10%. In this case, the bank will create $90,000 worth of new loans, thereby increasing the money supply by an additional $90,000.
Eventually, a second bank will receive this $90,000. This second bank will have $90,000 of excess reserves and expand their loans by 90%, or $81,000. This process will continue until the Fed’s initial purchase of $100,000 results in the Fed’s desired increase in the money supply of $1,000,000.
Again, this process is condensed in the equation below:
Change of 1m = 1/.10 x Change of 100k
The Fed was concerned with deflation when the crisis began in 2008. Ben Bernanke is convinced that the Great Depression could have been prevented if the Fed had combated deflation by increasing the money supply:[vii] By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy. Consequently, the Fed responded to the current crisis by pumping an unprecedented amount of reserves into the banking system.[viii] In August of 2008, bank reserves were $44.99 billion. This level of reserves supported $7,937 billion of demand deposits. [ix] The money stock, which is comprised of demand deposits and currency in circulation[x], was $8,712.3 billion. The reserve ratio at commercial banks was .567%.[xi]
Reserve Requirement = 44.9/7,937 = .567%
In contrast, bank reserves were $1,140.5 billion in December of 2009. In short, bank reserves increased by a stunning 2,400% between August of 2008 and December of 2009. Furthermore, a large proportion of the new reserves are excess reserves. Excess reserves in December of 2009 were $1,075.44 billion compared to $1.97 billion in August of 2008.[xii] The Fed’s attempt to prevent deflation has resulted in a dangerous increase in the banking system’s level of reserves. There is the potential for a massive increase in the nation’s money supply. Ben Bernanke recently acknowledged this danger: “the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures.”[xiii] If the banks return to their previous reserve ratio of .567%, then the money stock would increase to $202,029 billion![xiv]
201,164 = 1/.00567 X 1,140.5
Such a massive increase in the money supply poses a serious threat to the global economy and U.S. dollar. Hyperinflation would be the inevitable result.[xv] Hyperinflation would destroy the U.S. dollar and severely hamper economic activity by making commerce nearly impossible to conduct. This potential increase in the nation’s money supply constitutes the single greatest threat to global economic recovery.[xvi]
Some observers offer a simple solution. Some say the Fed should deal with the massive level of reserves by conducting open market operations. Selling securities in the open market would indeed remove reserves from the banking system. However, such a large sale of securities would drive up interest rates to intolerable levels.[xvii] This would cause widespread defaults and severely hamper economic activity.
The Fed’s current solution to the problem is paying interest on reserves.[xviii] This provides the banks with some incentive to refrain from lending. However, this cannot be a long term solution to the problem. The interest rate the Fed pays on the reserves is an extremely low .25%. Eventually banks will be tempted to forego the low, risk free interest they receive on their reserves and make loans that offer higher rates of return. More importantly, the Fed pays interest on bank reserves by simply creating more reserves. Paying interest on reserves results in more reserves, thereby compounding the problem. The Fed’s current policy of paying interest on reserves is simply delaying the inevitable and ensuring that the problem is much worse when we finally decide to address it.
The Fed can prevent a massive increase in the money supply by instituting a 100% legal reserve requirement. This change in the legal reserve requirement would be accompanied by an increase in the level of bank reserves, so that the level of reserves is equal to level of demand deposits. This plan can be carried out in three steps. First, the government should reinstitute Regulation Q. Regulation Q prohibited “member banks from paying interest on demand deposits”.[xix] Any account that was checkable was defined as a demand deposit, and any account that earned interest was not a demand deposit. This regulation gave us a simple definition of demand deposits, and hence a simple definition of the money supply.[xx] It will be difficult for the Fed to determine the amount of reserves to create without a simple measure of demand deposits. Reinstituting Regulation Q will ensure that the Fed creates the appropriate amount of reserves. Second, the Fed should create an amount of new reserves so the amount of total reserves is equal to the amount of demand deposits. Demand deposits were $8,716.7 billion in December of 2009. Reserves were $1,140.5 billion. Under these circumstances, the Fed should create new reserves of $7,576.2 billion. Third, the Fed should simultaneously institute a 100% legal reserve requirement. This means that there could be no further increase in the money supply. Furthermore, there would be no scope for a decrease in the money supply. It is very important that the 100% reserve requirement be strictly enforced. If banks used their new reserves to expand their loans, there could be a dangerous increase in the money supply.[xxi] Instituting a 100% reserve requirement with a corresponding increase in reserves will ensure that we don’t experience a dangerous increase in the money supply.
This plan has one especially important additional benefit. The increase in the amount of reserves will constitute a huge infusion of capital into the banks. Even the most troubled banks will be saved. This operation will save troubled banks and end the financial crisis. Suppose that a bank before the crisis had $100 of IOU’s and $10 of reserves. Total assets are $110. On the right hand side of the balance sheet, the bank has $100 of demand deposits and $10 of equity. Total liabilities and shareholders’ equity is $110. The reserve ratio is 10%. Now suppose the crisis strikes and the value of the bank’s IOU’s falls to $50. This dramatic fall in the value of the bank’s assets results in equity of -$40. The bank is now in serious trouble. If the proposed plan were implemented, the Fed would give the bank $90 of reserves so that the bank’s reserves were equal to their demand deposits. Notice that the bank’s equity account is now positive again. The bank has been saved by the injection of new reserves despite the losses on their loans. Even a bank that took a 100% loss on its loans would be able to satisfy all of their customers’ redemption demands.[xxii] The 100% legal reserve requirement will end the financial crisis by savings banks and preventing an insufferable increase in the money supply.
Read the entire article HERE.
By Simon Kennedy – Jan 27, 2011 1:13 AM PT
China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.
“You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today. Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said.
The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.
“We’ve started collecting Zimbabwe notes,” Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.
The Fed yesterday reiterated its intention to keep its benchmark “exceptionally low.”
Gao, whose sovereign wealth fund manages about $300 billion, signaled that while industrial nations are now more welcoming of China’s money following the financial crisis, their past criticisms may hurt their ability to attract it.
“People have long memories,” he said. “We have this yo- yo when being treated by a few major countries.”
“In many countries we are now treated differently,” he said. “We should be the most welcome investor.”
Inflation concerns have become a new theme in the hallways of Davos’s Congress Center as emerging markets including China tighten policy and record food prices fan social unrest in North Africa. Chinese inflation ran at 9.6 percent in December.
Inflation nevertheless is not an immediate concern and prices for securities that offer protection against it are “not up there yet,” Gao said. A record $13 billion auction of 10- year Treasury Inflation Protected Securities last week attracted lower-than-average demand.
“In shorter run, you look at the numbers and fundamentals and you think there’s some inflation pressure but it’s not something we have to worry about,” Gao said.
Read the entire article HERE.
100 Trillion Dollars, I’m a trillionaire!
Zimbabwe has the highest inflation rate in history. The corruption of the Mugabe regime can only be fought by awareness. The video below will blow you away…
As of 2010 the United States Dollar is now worth 4% of what it was worth when the US Dollar was first introduced. Yes, it has lost 96% of it’s purchasing power. In 1980, when Rhodesia became the Republic of Zimbabwe, a Zimbabwean Dollar was equal to 1.25 US Dollars. Very close in value. Today that Zim dollar is worthless and will not even buy a loaf of bread because food is more important than paper. One ounce of gold is worth $15, 741, 151, 712, 978, 422, 263.25 Zim dollars if anyone is willing to carry that amount of worthless dollars around. The old Zim was replaced by another series of Zimbabwe dollars and public confidence did not accept those banknotes either, so now the official currency in Zimbabwe is the US dollar, with South African Rand and Botswana Pula also accepted. However, the US Dollar is experiencing the same type of devaluation and continues to go down in value. Any investments based on the US Dollar are also becoming devalued such as stocks, bonds, mutual funds, 401K’s, even savings is dwindling. If inflation rate is 5+% and your savings yield is .05% there is a problem isn’t there? Currently US inflation rate is at 1.2 % and climbing from -0.4% in 2009. Economists believe that with the level of stimulus, the inflation rate should increase over 5+% within the next two years. This is what happens when governments intervene with bailouts. In contrast, precious metals are becoming stronger and stronger compared to the US Dollar. If you would like more information about how you can build a business while collecting silver numismatic coins for free, ask me.
To Your Success,