For Europe’s Future, Spain Is All That Matters. Spain requires $600 billion bail out. Firstly, it was Greece, in crisis mode—then last week, it was Ireland—and coming up next is Portugal— but all those pale in comparison to Spain.
If I had to bet on which country will bring about the end of the Euro—and perhaps even the end of the European Union—I’d have to say it’s Spain. Right now, no one is talking about Spain—Spanish spreads are as quiet as a guilty man in a police line-up—everyone’s too concerned over Ireland, and the upcoming Portuguese Situation.
But Spain is the key—Spain is what you should be paying attention to, if you want to find out what will happen to the European Monetary Union (EMU), and the European Union (EU) itself.
RECAP EVENTS.
Recap of last week’s exciting episode of I’m an Insolvent Nation—Get Me Out Of Here!:
Ireland got into trouble with the Euro bond markets after German Chancellor Angela Merkel made some not-very-clever remarks about Irish bond-holders needing to take some haircuts. The bond markets started to panic—yields on Irish debt started to widen—and then once again, it’s Sovereign Debt Panic Time. Poor communication strategy from European Leadership. Brinkmanship has yet to arrive in Europe.
The EU in conjunction with the European Central Bank (ECB) and the International Monetary Fund (IMF) put together a rescue package—but the Irish refused to take it, as they realized they would have to give up some of their hard-won sovereignty in exchange for this lifeline. To accede to this package, they’d likely have to slash government expenditures, take on “austerity measures”, and likely raise their precious 12.5% corporate income tax rate, which has been the carrot the Irish have used to get so much foreign investment over the last decade.
But the Irish deterioration in the bond markets began to pick up speed—finally on Sunday night, after a week of dithering, Irish Prime Minister Brian Cowen officially asked the European Union for a bail out. Bail out is not the solution but restructuring of loans over a long run....I am favor of Restructuring of debt. Why waste Tax-payers funds for these bad mistakes of the government. Sovereign default risk will continue to rise.
For Layman
Ireland is running a deficit, it needs to sell bonds—that is, borrow money—in order to finance its fiscal shortfall. If the bond markets do not have much faith that Ireland will pay back the bonds it emits, then the price of Irish bonds will go lower, which means the yields will go higher. In other words, Ireland will be forced to pay more for the money it is borrowing. The more it has to pay to borrow money, the greater the deficit, until finally, you get to the point where you cannot borrow enough to cover your deficit: In other words, you go broke. This was what was happening to Ireland, in simple terms
Just like they did with Greece, the European officials colossally messed up the bail-out package for Ireland. It turns out that—far from having put together a detailed package that could be swiftly implemented, and thereby restore confidence—the EU/ECB/IMF troika have only a flimsy framework for the Irish bailout. The vaunted European Financial Stability Facility? It’s not even fully funded yet!
So on Monday, the markets were jubilant—“Ireland is saved! Crisis averted!”—but then today Tuesday, they’re down in the dumps, as it is becoming increasingly clear how unprepared the European officials are. Their “rescue package” is vague on the details—to put it mildly.
Coupled to that, the bail-out announcement sparked a political fire-storm in Ireland—Cowen’s coalition partners, the Green Party, exited the government, and elections are now scheduled for January. There are even calls from Cowen’s own party for his immediate resignation.
This is bad enough—so what does the IMF go and do? Why, with exquisite political tone-deafness, it sends the clear message that Ireland is going to have to crawl if it wants the bail out: John Lipsky, a muckety-muck in the IMF, explains to Reuters that “our work there [in Ireland] is technical, not political. Decisions have to be made by [the Irish] government.” In other words, the IMF isn’t going to negotiate with Ireland—it’s going to dictate the terms and conditions.
Or in other words, the IMF is saying, Beg for the money, We will bail you out. So any effective clean-up of the Irish situation is going to take a while—assuming it actually happens. And just like the Greek bail-out last spring, it will be messy messy messy: Half-measures, dithering, “adjusted” figures, until finally the European officials wind up throwing twice as much money at the problem as originally expected. We might as well call the movie now playing in Dublin, Doin’ It Greek, Part II: Ireland!
To add insult to injury, all this politico-economic theater didn’t staunch what most worried the EU and the ECB: Contagion.
All the smaller, weaker European economies in the EMU are in the same boat as Ireland: They are all insolvent. Not just the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—but also Belgium, and maybe even France, if we steel ourselves and look at the numbers.
Right now, though, contagion has reached Portugal—the next-weakest link in the European Chain:
Portuguese debt yields are widening by about 50 basis point this morning, to 4.328% over the German bunds (10-year)—even after the Portuguese government implemented a second austerity package this past October, following their May spending cuts which did not convince the bond markets.
That’s because the Portuguese have a huge fiscal deficit: 9.4% of GDP. They are cutting spending, and they are raising taxes too—but still, their bond yields are rising: The market doesn’t think that Portugal will make it through this crisis intact. Just like Greece, just like Ireland, the Portuguese will need to be bailed out. European union, ECB and big country [ Germany] will have to do lot of running around......
And so that clears the way for the bond market’s anxieties to focus on the real elephant in the drawing room:
Spain.
According to IMF numbers for 2009,
GDP OF Greece $331 billion,
GDP OF Ireland $221 billion,
GDP OF Portugal $233 billion, &
GDP OF Spain $1.47 Trillion
Spain’s GDP is roughly twice Greece, Ireland and Portugal combined. In other words, close to half of Germany’s GDP.
And what is Spain’s fiscal deficit? Last year, it was officially 7.9% of GDP—twice the EU limit. Not Irish or Portuguese or much less Greek numbers, but still up there—officially.
Why do I say “officially”? And now put “officially” in scare quotes? Because of a very disturbing anonymous paper, released last September 30 2009.
It basically said that the Spanish GDP numbers for 2009 were cooked—and then went ahead and showed the whys and hows of this analysis. FT originally ran the piece—and it was picked up by everybody, freaking everyone out. But then FT retracted under political pressure, excusing their cowardice by saying “life is too short”.
According to as pointed out by Paul Krugman was essentially advocating war as a fiscal stimulus solution...But figures are fudged. Taking into account, the considerable bad things about Greece, regarding faked GDP data—and knowing the Spanish—I wouldn’t be a bit surprised that Spanish GDP figures have been faked in Madrid, in order to keep everything copacetic.
But even if they haven’t been, it’s not as if the official numbers are painting a rosy picture: Spain has nearly 20% unemployment, near 10% yearly fiscal deficit to GDP, and no clear way how to get out of this hole that it is in. So much of Spanish growth over the last decade was fueled by real estate development and over-levaraging, that there’s no clear way forward for the Spanish.
Now, if there is a Greek/Irish-style crisis with Spain—in other words, if there is a run on Spanish debt—how much will the EU/ECB/IMF have to pony up, to bail out Spain?
Let’s look at Greece and Ireland:
Originally it was thought that €45 billion would be enough to bail out Greece—but the final tally for that looked to be something like €90 billion (about $122 billion). At this time, bailing out Ireland is going to come to something similar over the next 3 years—€90 billion—assuming, of course, there aren’t any hidden nightmares in the Irish banking sector, which is the reason Ireland is going under.
In both these cases, essentially three times the yearly deficit was the ballpark figure for the European bailouts.
Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.
Look at that number again—look at it closely, and take your time:
€450 billion.
That’s twice the size of Ireland’s total GDP for 2009. In order to figure out how much each party would have to shoulder of this €450 billion price tag.
Fair enough: If we go by Greek and Irish percentages, then roughly a third of that €450 billion price tag to bail out Spain would be shouldered by the IMF—and as everyone knows, the U.S. puts up 20% of IMF money. So the U.S. would be on the line for €30 billion—$40 billion—to save Spain. American banks exposure is roughly $77 billion. Safe bet. The U.S. is going to say ‘Yes’ to that and ‘No’ to California? No way. Not going to happen with this new Congress.” But the question is, will the US saved Spain? No way will the U.S. shell out $77 billion to save Spain.
Therefore, the IMF’s participation in a Spanish bail-out will be severely reduced, if not marginal. Therefore, bailing out Spain will be a strictly European affair.
Does Europe have €450 billion to bail out Spain? That is, does Germany have €450 billion to bail out Spain? No it does not. It does not have the money for such a bailout—and even if it did, it does not have the political will to push through such a bailout. Period.
But even if—by some monumental financial miracle coupled to an equally monumental political miracle—Europe somehow managed to find the money to bail out Spain without depreciating the Euro? What then?
The Spanish economy won’t be improving any time soon—and neither will the economies of the other smaller countries like Greece, Ireland, Portugal, Belgium. Not when they’re locked into the Euro, and are therefore unable to depreciate in order to spur growth and investment.
See, even if there is the money and the political will to save Spain—which I don’t believe—the only way to bail out Spain in such a way that it has an economic future is to cut it loose from the Euro. If it is kept locked in the EMU, the Euro will become a weight around its neck, dragging its economy down until in a few years, there will be the need for yet another bail out of Spain. That goes doubly so for the smaller countries, like Greece, Ireland, Portugal, Belgium.
Therefore, I believe that if and when there is a run on Spanish sovereign debt, and Spain slips into the position of having to be bailed out like Greece and Ireland, that will be Cruncht ime Europe: That will force an inevitable realignment of the European economy, and the European continent.
Best case?
Though they remain in the European Union, the weaker economies exit the EMU and go back to local currencies, which they quickly depreciate, while their Euro-denominated sovereign debts are restructured and paid off over time. The Euro becomes the currency of France, Germany, Holland, Finland and Austria.
Worst case?
I can imagine a number of worst cases, all of them different, except for one thing in common: They’ll all be bad.
Disclaimer: This is just a research piece and not an investment advice. Please execute your own due diligence before making or taking any investment decisions to invest in countries, stocks, bonds, equities, commodities, real estate and currencies
Wednesday, November 24, 2010
Monday, November 22, 2010
Prepare for the next bank's crisis---By Shan Saeed
Get ready for the next crisis in the banking industry. During the housing boom, banks underwrote over $2.1 trillion in subprime, alt-A and option-adjustable rate mortgages underwriting could have losses as high as $727 billion.
The problem is, they weren’t particularly careful in how they performed their duties.
Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create a potential liability for the banks. The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. So the potnetial in banks stockes pull-back is inevitable.
Investors who bought this mostly AAA rated junk as mortgage-backed securities are not simply going to swallow the losses quietly. These investors –including Fannie Mae, Freddie Mac, Pacific Investment Management (PIMCO) and BlackRock (BLK) are seeking redress. Under certain circumstances, the terms of their purchase agreements allow them to put back the mortgages to the banks.
Bank of America, with its still awful Countrywide and Merrill acquisitions, has the greatest exposure, at over $35 billion. Citigroup somehow has a mere $8B in potential putback losses.
_______________________________________________________
A Potentially Big Hit
Big banks could lose $134 billion if mortgage securities are put back to them, according to Compass Point Research & Trading.
Company/Ticker Estimated
Loss (bil) Per
Share* % Tangible
Book Value
Bank of America /BAC
$35.2 $2.11 17%
JPMorgan Chase /JPM
23.9 3.59 13
Deutsche Bank /DB
14.1 12.56 21
Goldman Sachs /GS
11.2 12.43 11
RBS Greenwich /RBS
9.4 0.10 12
Credit Suisse /CS
8.9 4.50 22
UBS /UBS
8.4 1.32 15
Morgan Stanley /MS
7.9 3.37 14
Citigroup /C
7.8 0.16 4
Barclays /BCS
3.6 0.18 3
HSBC /HBC
3.5 0.22 2
Total 133.8
** AFTER TAX.
Sources: Compass Point Research & Trading LLC; Bloomberg; Inside MBS & ABS Asset Backed Alert
How to prepare to avoid these crises?
Banking issues are clearly resurfacing in recent months as the sovereign debt crisis flares up again and the mortgage fiasco in the U.S. comes to light. In addition, there is a very serious risk that a housing double dip will exacerbate all of these problems. Several reports in recent weeks support my theory that housing prices are indeed set to decline further in 2011. There are additional risks, however, and many of these issues are in fact being exacerbated by the Federal Reserve itself. In my recent presentation on TV, I have clearly highlighted why I believe the next US banking crisis is right around the corner and why the Fed is in large part to thank:
Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
Unfortunately, measured in dollars, gross interest revenue ofthe banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks, savers are literally dying from lack of yield on assets due to QE/ZIRP. History is the guide to illustrate and validate my point which holds water.
In the post WWII period, Fed interest rate cuts resulted in significant reduction in average mortgage borrowing costs for households ‐‐ until 2008, when mortgage rates implied by the bond market fell significantly but households were not able to refinance.
Fees charged by Fannie Mae and Freddie Mac, and a mortgage origination cartel led by the big four banks (BAC, WFC, JPM, C), are now 4‐5 points on new origination loans vs. less than 1 point during housing boom. Huge subsidy for largest zombie banks effectively blocks refinancing by millions of households.
These fees, which can add up to 7 to 10% of the face value of the loan, raise mortgage rates to borrowers by hundreds of basis points. Banks and the housing GSEs, however, saw significant benefits in declines in funding costs thanks to low fed funds rates.
Opportunities in distressed state:
For banks and investors, one of the biggest opportunities for gain is to invest in the stronger regional banks that are acquiring troubled or failed institutions. Resolution results in losses, but also creates value for investors and society.
Acquiring failed banks from the FDIC is extremely attractive for existing banks, which tend to get preference from regulators in failed bank sales. Attractive pricing, lack of legacy liabilities key positives for investment thesis.
Another way for investors to exploit the bank restructuring process is to purchase troubled assets. So far, Fed QE and ZIRP are enabling banks to resist selling bad assets.
In addition, the FDIC, NCUA and other agencies are issuing RMBS and CMBS securities with government guarantees that offer attractive yields compared with Treasury debt.
Conclusions
The U.S. banking industry entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses. We are less than ¼ of the way through foreclosures. The issue is recognizing existing losses ‐‐ not if a loss occurred.
Failure by the Bush/Obama to restructure the largest banks during 2008‐ 2009 period only means that this process is going to occur over next three to five years–whether we like it or not. Lower growth, employment are the cost of this lack of courage and vision. Deleveraging in consumers is on the rise.....
The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses. The latter course condemns Americans to years of economic malaise and further job losses.
Source: Institutional Risk Analytics
The new Basel III banking rules will leave the biggest U.S. banks short of between $100 billion and $150 billion in equity capital, with 90 percent of the shortfall concentrated in the top six banks.
Banks will need to hold top quality capital equal to 8 percent of their total assets — a one point cushion against falling below the effective global minimum of 7 percent set in September by the Basel Committee on Banking Supervision.
The regulations mean banks may need to increase their capital through
1. Retained earnings OR
2. Issuing equity OR
3. Banks need to cut their risk-weighted assets by selling off assets
and cutting back riskier business.
These shortfalls are entirely manageable. But the big and the more difficult question is what affect the new rules will have on the i) COST, ii) AVAILABILITY OF CREDIT & iii) BANKS PROFITABILITY. US banks can cut their equity needs by $10 billion with each $125 billion reduction in risk-weighted assets. Get ready for more headwinds and nosie coming out of the market. More Blood would be bleeding from the global financial system. Will PIIGS reduce some blood in the financial markets remain to be seen. Portugal and Spain are next in line of fire.
Disclaimer: This is just a research piece and not an investment advice. Investors and readers are encouraged to execute their own Due diligence for the strategic investment decision in the long run.
The problem is, they weren’t particularly careful in how they performed their duties.
Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create a potential liability for the banks. The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. So the potnetial in banks stockes pull-back is inevitable.
Investors who bought this mostly AAA rated junk as mortgage-backed securities are not simply going to swallow the losses quietly. These investors –including Fannie Mae, Freddie Mac, Pacific Investment Management (PIMCO) and BlackRock (BLK) are seeking redress. Under certain circumstances, the terms of their purchase agreements allow them to put back the mortgages to the banks.
Bank of America, with its still awful Countrywide and Merrill acquisitions, has the greatest exposure, at over $35 billion. Citigroup somehow has a mere $8B in potential putback losses.
_______________________________________________________
A Potentially Big Hit
Big banks could lose $134 billion if mortgage securities are put back to them, according to Compass Point Research & Trading.
Company/Ticker Estimated
Loss (bil) Per
Share* % Tangible
Book Value
Bank of America /BAC
$35.2 $2.11 17%
JPMorgan Chase /JPM
23.9 3.59 13
Deutsche Bank /DB
14.1 12.56 21
Goldman Sachs /GS
11.2 12.43 11
RBS Greenwich /RBS
9.4 0.10 12
Credit Suisse /CS
8.9 4.50 22
UBS /UBS
8.4 1.32 15
Morgan Stanley /MS
7.9 3.37 14
Citigroup /C
7.8 0.16 4
Barclays /BCS
3.6 0.18 3
HSBC /HBC
3.5 0.22 2
Total 133.8
** AFTER TAX.
Sources: Compass Point Research & Trading LLC; Bloomberg; Inside MBS & ABS Asset Backed Alert
How to prepare to avoid these crises?
Banking issues are clearly resurfacing in recent months as the sovereign debt crisis flares up again and the mortgage fiasco in the U.S. comes to light. In addition, there is a very serious risk that a housing double dip will exacerbate all of these problems. Several reports in recent weeks support my theory that housing prices are indeed set to decline further in 2011. There are additional risks, however, and many of these issues are in fact being exacerbated by the Federal Reserve itself. In my recent presentation on TV, I have clearly highlighted why I believe the next US banking crisis is right around the corner and why the Fed is in large part to thank:
Many on Wall Street believe that net interest margin or NIM among U.S. banks is at record levels. They are right, but not in the way that many investors and analysts expect.
Unfortunately, measured in dollars, gross interest revenue ofthe banking industry has been cut by a third over the past three years due to the Fed’s zero interest rate policy. Banks, savers are literally dying from lack of yield on assets due to QE/ZIRP. History is the guide to illustrate and validate my point which holds water.
In the post WWII period, Fed interest rate cuts resulted in significant reduction in average mortgage borrowing costs for households ‐‐ until 2008, when mortgage rates implied by the bond market fell significantly but households were not able to refinance.
Fees charged by Fannie Mae and Freddie Mac, and a mortgage origination cartel led by the big four banks (BAC, WFC, JPM, C), are now 4‐5 points on new origination loans vs. less than 1 point during housing boom. Huge subsidy for largest zombie banks effectively blocks refinancing by millions of households.
These fees, which can add up to 7 to 10% of the face value of the loan, raise mortgage rates to borrowers by hundreds of basis points. Banks and the housing GSEs, however, saw significant benefits in declines in funding costs thanks to low fed funds rates.
Opportunities in distressed state:
For banks and investors, one of the biggest opportunities for gain is to invest in the stronger regional banks that are acquiring troubled or failed institutions. Resolution results in losses, but also creates value for investors and society.
Acquiring failed banks from the FDIC is extremely attractive for existing banks, which tend to get preference from regulators in failed bank sales. Attractive pricing, lack of legacy liabilities key positives for investment thesis.
Another way for investors to exploit the bank restructuring process is to purchase troubled assets. So far, Fed QE and ZIRP are enabling banks to resist selling bad assets.
In addition, the FDIC, NCUA and other agencies are issuing RMBS and CMBS securities with government guarantees that offer attractive yields compared with Treasury debt.
Conclusions
The U.S. banking industry entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses. We are less than ¼ of the way through foreclosures. The issue is recognizing existing losses ‐‐ not if a loss occurred.
Failure by the Bush/Obama to restructure the largest banks during 2008‐ 2009 period only means that this process is going to occur over next three to five years–whether we like it or not. Lower growth, employment are the cost of this lack of courage and vision. Deleveraging in consumers is on the rise.....
The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses. The latter course condemns Americans to years of economic malaise and further job losses.
Source: Institutional Risk Analytics
The new Basel III banking rules will leave the biggest U.S. banks short of between $100 billion and $150 billion in equity capital, with 90 percent of the shortfall concentrated in the top six banks.
Banks will need to hold top quality capital equal to 8 percent of their total assets — a one point cushion against falling below the effective global minimum of 7 percent set in September by the Basel Committee on Banking Supervision.
The regulations mean banks may need to increase their capital through
1. Retained earnings OR
2. Issuing equity OR
3. Banks need to cut their risk-weighted assets by selling off assets
and cutting back riskier business.
These shortfalls are entirely manageable. But the big and the more difficult question is what affect the new rules will have on the i) COST, ii) AVAILABILITY OF CREDIT & iii) BANKS PROFITABILITY. US banks can cut their equity needs by $10 billion with each $125 billion reduction in risk-weighted assets. Get ready for more headwinds and nosie coming out of the market. More Blood would be bleeding from the global financial system. Will PIIGS reduce some blood in the financial markets remain to be seen. Portugal and Spain are next in line of fire.
Disclaimer: This is just a research piece and not an investment advice. Investors and readers are encouraged to execute their own Due diligence for the strategic investment decision in the long run.
Monday, November 15, 2010
Recipe for US dollar disaster --By Shan Saeed
Debasing of US dollar will not help the US economic growth or exports. It might be a tactical manouevring for limited short-term benefits. This strategy is not sustainable.
Federal Reserve’s accommodative policy will keep pushing the dollar lower, so investors would eventually buy foreign currencies like Aussie / Canadian Dollar[ commodity currencies], Gold and Silver to protect their wealth. Indeed, the precious metals may ultimately touch new highs going forward.
Fed strategy of increasing monetary base is ominous for the long run. It’s money printing in its simplest form. It drives up the cost of goods. It’s just a recipe for disaster. And it won’t do very much at all for the unemployment rate. I don’t think a country has ever prospered historically by diluting or debasing the value of its currency. In this case..US DOLLAR
Obama administration is hypocritical in calling for China to boost the value of the yuan. It is not the Chinese yuan but the US dollar which is the problem..Yuan has appreicated 24% against US dollar in the last 5 years. Currency war is initiated by US to replicate the 1930's scenario to punish the chinese when it abandoned silver standards. US is intentionally holding down the value of its currency. Benefits? To boost exports, create a bubble in the emerging market to have ripple effect on the global economy.
The reason Chinese don’t budge nearly as much as they possibly should is simple. They understand the US STRATEGY for dollar and chinese yuan. A weak dollar is never in the national or global interest. It’s never in my interest to have my dollars worth 80 cents. Strong dollar will provide confidence to the investors globally. This is strategically helpful for the US Dollar.
But I expect that the greenback would go down further. Maybe losing 5-7% of its value against the basket of currencies. I do think that FED will continue to undermine the dollar for the short-run. It is widely anticipated that more quantitative easing from the Fed. Thats the only game plan.
Strategy is simple
To flood the market with access cash and to throw more money in the emerging markets to create an asset bubble. This is strange that they don’t have a clue about true economics, or they are deliberatng ignoring for a short-term benefit. Lifting investors confidence with too much liquidity in the financial markets.
The Fed is highly unlikely to pull back from its easing in time to avert inflation. Their speeches will guide you that they’re pre-emptive on inflation. They’ll hike rates when they see signs of this thing happening. Precarious
The problem is that by the time you see signs of this thing happening, it’s already getting out of hand. It takes six to 12 months for a rate hike to take effect. Proven empirical studies illustrate that. So the question is how should investors deal with this sorry state of affairs? Buy foreign currencies — the Australian dollar or real asset or currencies like GOLD or SILVER.
Australia is raising interest rates, so you earn more income than in greenbacks. Investors are buying a currency that’s appreciating against the U.S. dollar and can rise in the face of inflation, because Australia’s a major commodity exporter.
As for as gold is concern, I think it ultimately has more room for upsurge since it is moving in parabolic form. It’s poised for a pullback in the near term. But, long-term, could it top $1,500/ounce in the next 14-months. I predicted Silver touching $27/ ounce in 18 months ...Silver kissed $27/ounce and pulled back..Bullish for its upside.
Disclaimer: This is just a research piece and not an investment advice..Inestors are encouraged to execute their own DD and investment strategy analysis
Federal Reserve’s accommodative policy will keep pushing the dollar lower, so investors would eventually buy foreign currencies like Aussie / Canadian Dollar[ commodity currencies], Gold and Silver to protect their wealth. Indeed, the precious metals may ultimately touch new highs going forward.
Fed strategy of increasing monetary base is ominous for the long run. It’s money printing in its simplest form. It drives up the cost of goods. It’s just a recipe for disaster. And it won’t do very much at all for the unemployment rate. I don’t think a country has ever prospered historically by diluting or debasing the value of its currency. In this case..US DOLLAR
Obama administration is hypocritical in calling for China to boost the value of the yuan. It is not the Chinese yuan but the US dollar which is the problem..Yuan has appreicated 24% against US dollar in the last 5 years. Currency war is initiated by US to replicate the 1930's scenario to punish the chinese when it abandoned silver standards. US is intentionally holding down the value of its currency. Benefits? To boost exports, create a bubble in the emerging market to have ripple effect on the global economy.
The reason Chinese don’t budge nearly as much as they possibly should is simple. They understand the US STRATEGY for dollar and chinese yuan. A weak dollar is never in the national or global interest. It’s never in my interest to have my dollars worth 80 cents. Strong dollar will provide confidence to the investors globally. This is strategically helpful for the US Dollar.
But I expect that the greenback would go down further. Maybe losing 5-7% of its value against the basket of currencies. I do think that FED will continue to undermine the dollar for the short-run. It is widely anticipated that more quantitative easing from the Fed. Thats the only game plan.
Strategy is simple
To flood the market with access cash and to throw more money in the emerging markets to create an asset bubble. This is strange that they don’t have a clue about true economics, or they are deliberatng ignoring for a short-term benefit. Lifting investors confidence with too much liquidity in the financial markets.
The Fed is highly unlikely to pull back from its easing in time to avert inflation. Their speeches will guide you that they’re pre-emptive on inflation. They’ll hike rates when they see signs of this thing happening. Precarious
The problem is that by the time you see signs of this thing happening, it’s already getting out of hand. It takes six to 12 months for a rate hike to take effect. Proven empirical studies illustrate that. So the question is how should investors deal with this sorry state of affairs? Buy foreign currencies — the Australian dollar or real asset or currencies like GOLD or SILVER.
Australia is raising interest rates, so you earn more income than in greenbacks. Investors are buying a currency that’s appreciating against the U.S. dollar and can rise in the face of inflation, because Australia’s a major commodity exporter.
As for as gold is concern, I think it ultimately has more room for upsurge since it is moving in parabolic form. It’s poised for a pullback in the near term. But, long-term, could it top $1,500/ounce in the next 14-months. I predicted Silver touching $27/ ounce in 18 months ...Silver kissed $27/ounce and pulled back..Bullish for its upside.
Disclaimer: This is just a research piece and not an investment advice..Inestors are encouraged to execute their own DD and investment strategy analysis
Real estate market in USA is facing headwinds---Shan Saeed
I have been sharing my analysis with my friends and assocaites..Where is the Housing Market of US heading towards? Down-hill....
More bad news for the housing market is coming up. The housing figures released their third quarter report and it largely echos: Double dip or somersault is coming. Home values fell an average -4.3% in the third quarter. This is quite ominous. The housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next fall i.e. 2011.
It is widely expected that the unceasing declines in home values signal that we’re in for a long, bleak winter of continued troubles for the housing market. The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn, and, with encouraging signs fading, will easily eclipse it in the coming months. Fire sale is going to get HOT....
The number of foreclosures reached a new all-time high and that the number of homeowners under the bridge on their loan has now reached 2% – a high this year. Depressing..Valutations are down by 57% since the start of this financial meltdown.
The high percentage of homeowners in negative equity continues to be troubling, in that it represents a huge number of people who are not only more vulnerable to foreclosure, but who are essentially trapped in their current homes and are prevented from selling and buying a new home. This has profound implications for future demand and will be a millstone around the neck of the housing market. Consumers are uncertain with deleveraging taking its hold.
Housing market is playing out almost exactly as I predicted last summer. This is pure demand-supply dynamics at work. The overhang of inventory is crushing meager demand and the mortgage mess isn’t helping matters as shadow inventory is pushed further into the future. Housing market was the domino that set the credit crisis in motion in 2007 and it could pose a very serious risk in 2011.
Disclaimer: This is just a research piece and not an investment advice..Investors are encouraged to execute their own DD and investment strategy analysis.
More bad news for the housing market is coming up. The housing figures released their third quarter report and it largely echos: Double dip or somersault is coming. Home values fell an average -4.3% in the third quarter. This is quite ominous. The housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next fall i.e. 2011.
It is widely expected that the unceasing declines in home values signal that we’re in for a long, bleak winter of continued troubles for the housing market. The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn, and, with encouraging signs fading, will easily eclipse it in the coming months. Fire sale is going to get HOT....
The number of foreclosures reached a new all-time high and that the number of homeowners under the bridge on their loan has now reached 2% – a high this year. Depressing..Valutations are down by 57% since the start of this financial meltdown.
The high percentage of homeowners in negative equity continues to be troubling, in that it represents a huge number of people who are not only more vulnerable to foreclosure, but who are essentially trapped in their current homes and are prevented from selling and buying a new home. This has profound implications for future demand and will be a millstone around the neck of the housing market. Consumers are uncertain with deleveraging taking its hold.
Housing market is playing out almost exactly as I predicted last summer. This is pure demand-supply dynamics at work. The overhang of inventory is crushing meager demand and the mortgage mess isn’t helping matters as shadow inventory is pushed further into the future. Housing market was the domino that set the credit crisis in motion in 2007 and it could pose a very serious risk in 2011.
Disclaimer: This is just a research piece and not an investment advice..Investors are encouraged to execute their own DD and investment strategy analysis.
Tuesday, November 9, 2010
What will cause the next crisis? By Shan Saeed
Get ready before the hard times hit you badly......By Shan Saeed
It's not going to be another Lehman that happened on 15th September, 2008
A failure of a bank or major corporation won't cut it anymore. Governments globally have shown they're willing to step in and bail out private enterprise to any tune.
Last year, it looked like another crisis might arise with the failure of a government. But the Greek crisis back in May 2010 showed that governments are also willing to step in and bail out other governments. PIGS is still a threat to the economic and financial stability of euro...
So what should we be looking for as a potential trigger to another financial crisis?
It's going to be something at the government level. Something that makes governments unable to intervene and create new money in order to bail out trouble spots in the private sector.
There's a few ways this could happen.
Bond markets. If investors stop buying a nation's sovereign debt, it could impede the ability of that government to create new money. But so far this isn't happening. Investors bought $2.4 trillion in American bonds this past fiscal year, more than paying the U.S. deficit.
It could be public outcry. If the people rally hard enough against profligate government spending, they might be able to handcuff their leaders. The US Tea Party movement is one sign of this happening, although it's unclear yet whether this group will have any material effects on government spending.
Maybe currencies will be the brake. Theoretically, the more a nation prints cash, the more the value of its money will fall. The loss of spending power should eventually force an end to money creation. Advance economies will keep weak currencies to boost exports...
Except that the world's largest economies are printing and devaluing in tandem – meaning that major currencies are staying roughly equal, relative to each other. Dollar, Pound, Yen and Euro
But here's a new one that just emerged yesterday: perhaps monetary tampering or monetary dumping would be halted by international peer pressure.
Such a move was suggested by World Bank president Robert Zoellick in a Financial Times article on 5th Nov. Among other things, Zoellick wrote that the global economy should move back to a gold standard. And that major nations should "agree to forego currency intervention, except in rare circumstances agreed to by others."
A gold standard would hamstring governments in printing new money. So would a system where monetary interventions need to be approved by a world vote. Bu the point is , do we have enough Gold supplies to meet the demand globally? Supplies are flat. Such a system would open the door for insolvent banks and corporations to once again fail in the good, old-fashioned way.
Could such a system come to pass? Currencies and global trade are already becoming a heated issue in many parts of the world. Just look at the renewed pressure on China to re-value the renminbi.
If things get rough enough, world leaders might be forced to sit down and negotiate something like Zoellick suggests. If you're wondering what's ahead for global finance, this is an area to keep watching for signs. Protectionism and structure devaluation of currencies would be the strategic interest of many advanced economies...
It's not going to be another Lehman that happened on 15th September, 2008
A failure of a bank or major corporation won't cut it anymore. Governments globally have shown they're willing to step in and bail out private enterprise to any tune.
Last year, it looked like another crisis might arise with the failure of a government. But the Greek crisis back in May 2010 showed that governments are also willing to step in and bail out other governments. PIGS is still a threat to the economic and financial stability of euro...
So what should we be looking for as a potential trigger to another financial crisis?
It's going to be something at the government level. Something that makes governments unable to intervene and create new money in order to bail out trouble spots in the private sector.
There's a few ways this could happen.
Bond markets. If investors stop buying a nation's sovereign debt, it could impede the ability of that government to create new money. But so far this isn't happening. Investors bought $2.4 trillion in American bonds this past fiscal year, more than paying the U.S. deficit.
It could be public outcry. If the people rally hard enough against profligate government spending, they might be able to handcuff their leaders. The US Tea Party movement is one sign of this happening, although it's unclear yet whether this group will have any material effects on government spending.
Maybe currencies will be the brake. Theoretically, the more a nation prints cash, the more the value of its money will fall. The loss of spending power should eventually force an end to money creation. Advance economies will keep weak currencies to boost exports...
Except that the world's largest economies are printing and devaluing in tandem – meaning that major currencies are staying roughly equal, relative to each other. Dollar, Pound, Yen and Euro
But here's a new one that just emerged yesterday: perhaps monetary tampering or monetary dumping would be halted by international peer pressure.
Such a move was suggested by World Bank president Robert Zoellick in a Financial Times article on 5th Nov. Among other things, Zoellick wrote that the global economy should move back to a gold standard. And that major nations should "agree to forego currency intervention, except in rare circumstances agreed to by others."
A gold standard would hamstring governments in printing new money. So would a system where monetary interventions need to be approved by a world vote. Bu the point is , do we have enough Gold supplies to meet the demand globally? Supplies are flat. Such a system would open the door for insolvent banks and corporations to once again fail in the good, old-fashioned way.
Could such a system come to pass? Currencies and global trade are already becoming a heated issue in many parts of the world. Just look at the renewed pressure on China to re-value the renminbi.
If things get rough enough, world leaders might be forced to sit down and negotiate something like Zoellick suggests. If you're wondering what's ahead for global finance, this is an area to keep watching for signs. Protectionism and structure devaluation of currencies would be the strategic interest of many advanced economies...
Friday, November 5, 2010
QE2 wont boost the economy--By Shan Saeed
Fed's Plan is an illusion....Its risky.......By Shan Saeed
The cat is out, Ben Benanke announced massive $600 billion bond purchase to kick-start the economy. But will it work? I doubt and its a risky path. Its an illusion. The U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery.
The Fed announced Wednesday that it would purchase $600 billion in Treasury, aiming to lower long-term interest rates in an effort to spur spending, increase asset price and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds. QE1 did not work to boost the economy....If US compares itself with German, they are doing much better...USA borrowed 6% of GDP for the stimulus injection in the economy. The German's borrowed 1.5% of GDP for stimulus to revive the economy..Stimulus is working in Germany but the size is small. But not in USA.....The confidence level remains very low....
The Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."
The Fed's move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the U.S. will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets. Let me warn you that the U.S. won't find its way out of the economic doldrums through over-stimulation.
"The thought that you can create a prosperous economy by inflating is an illusion, in my judgment. And we should never forget that. I thought what the lesson I learnt at Uni. of Chicago, Booth School of Business should spread and be shared with others. Printing money does not fix the economy..Its a tactical maneuvering to provide breathing space to the economy....Fiscal and Monetary policies work in tandem not alone....
The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus.
Fed Game plan looks very simple. The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up, lower yields and interest rates down. But if people get concerned about longer run inflationary impacts, the effects go in the other direction."
In theory, the Fed's action is expected to lower interest rates because bond prices and interest rates - also known as yields - move in opposite directions. The yield is the fixed amount of annual interest paid to the owner of the bond expressed as a percentage of the bond price, so the extra demand created by the Fed's purchases should push bond prices up and lower the yield. But when investors fear inflation will be higher in the future they demand that bonds pay a higher interest rate to protect their investment from the value-eroding effects of inflation.
SOME AFTERSHOCK PREDICTIONS
Aftershock's predictions for the future are not positive for US economy. The picture is very disturbing. Please hold your breadth.
— A nearly unfathomable level of unemployment.
— An already bad real estate market gets drastically worse
— A historic drop in the stock market
— An attack of hyperinflation
— The collapse of the dollar and possible rise of a one-world currency
— Simple goods become unaffordable
Disclaimer: This is just a research piece and not an investment advice. Please use your own due diligence / judgment call for investment strategy or decision
The cat is out, Ben Benanke announced massive $600 billion bond purchase to kick-start the economy. But will it work? I doubt and its a risky path. Its an illusion. The U.S. central bank's plan to buy hundreds of billions of dollars in government bonds probably won't do much to boost the economic recovery.
The Fed announced Wednesday that it would purchase $600 billion in Treasury, aiming to lower long-term interest rates in an effort to spur spending, increase asset price and ultimately lower the U.S. unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of $1.7 trillion in mortgage and Treasury bonds. QE1 did not work to boost the economy....If US compares itself with German, they are doing much better...USA borrowed 6% of GDP for the stimulus injection in the economy. The German's borrowed 1.5% of GDP for stimulus to revive the economy..Stimulus is working in Germany but the size is small. But not in USA.....The confidence level remains very low....
The Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."
The Fed's move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the U.S. will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets. Let me warn you that the U.S. won't find its way out of the economic doldrums through over-stimulation.
"The thought that you can create a prosperous economy by inflating is an illusion, in my judgment. And we should never forget that. I thought what the lesson I learnt at Uni. of Chicago, Booth School of Business should spread and be shared with others. Printing money does not fix the economy..Its a tactical maneuvering to provide breathing space to the economy....Fiscal and Monetary policies work in tandem not alone....
The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus.
Fed Game plan looks very simple. The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up, lower yields and interest rates down. But if people get concerned about longer run inflationary impacts, the effects go in the other direction."
In theory, the Fed's action is expected to lower interest rates because bond prices and interest rates - also known as yields - move in opposite directions. The yield is the fixed amount of annual interest paid to the owner of the bond expressed as a percentage of the bond price, so the extra demand created by the Fed's purchases should push bond prices up and lower the yield. But when investors fear inflation will be higher in the future they demand that bonds pay a higher interest rate to protect their investment from the value-eroding effects of inflation.
SOME AFTERSHOCK PREDICTIONS
Aftershock's predictions for the future are not positive for US economy. The picture is very disturbing. Please hold your breadth.
— A nearly unfathomable level of unemployment.
— An already bad real estate market gets drastically worse
— A historic drop in the stock market
— An attack of hyperinflation
— The collapse of the dollar and possible rise of a one-world currency
— Simple goods become unaffordable
Disclaimer: This is just a research piece and not an investment advice. Please use your own due diligence / judgment call for investment strategy or decision
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