Peter Schiff wraps up 2010

Year end wrap up (video)

Schiff says home prices are still too high & would have to decline 20% to get back to historical trendline.

Student debt threatens US economy

International Business Times notes outstanding student debt at $875 billion is a problem larger than credit card debt. The national cohort default rate on federal student loans is 7% (for borrowers entering repayment in 2008) - compared to 8.8% default for credit cards, & 9.1% for home mortgages.

The situation is made worse by the economic recession making jobs scarce for graduates. Project on Student Debt reports unemployment rate for recent graduates at  8.7% in 2009.

Lacking employment, inability to refinance, being unable to wipe out the debt in bankruptcy leaves students with a lifelong burden affecting their credit histories and thus spending capabilities - this will depress the economy.

Humpty Dumpty

Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
All the king's horses and all the king's men
Couldn't put Humpty together again



Oh well, it's Christmas ...

Risks to Economy

Overhanging risks to the economy :

1. China is overheating
2. Europe is crumbling
3. QE creating uncertainty
4. US housing double dip
5. Major austerity in state & local level
6. Currency wars
7. Military skirmish in Korea
8. Economists are too optimistic
9. Canadian housing bust
10. Canadian household leverage
11. Canadian economy is weak
12. Canadian dollar overvalued

US vs China : who goes down first ?

Andy Xie :  One could describe the global economy as a race between US and China, to see who goes down first.

The global economy may be coming up for a breath of fresh air in 2011. Fiscal and monetary policies around the world have been highly stimulated for three years. The additional monetary and fiscal stimulus measures by the U.S. could generate an upside surprise to its 2011 growth rate. Most emerging economies continue to grow rapidly. By the middle of 2011, most analysts may declare that the world has finally put the financial crisis behind it.

The reality is quite different. The global economy is kept afloat by massive monetary and fiscal stimulus around the world. The main problem in the global economy — high costs and declining competitiveness in the developed world, and inflation plus asset bubbles in the developing world continue unabated. Either inflation in the developing world or unsustainable sovereign debt in the developed world will spark the next crisis.

Deficit dagger pointing at heart of economy

CNN   "It is a racket what is going on in Washington. Here we had a deficit commission, we discussed these issues for months and all of the sudden the President and the Republicans get together and there’s another trillion dollars given away over 2 years. It’s really shocking stuff actually"
- Jeffrey Sachs, Columbia professor & special adviser to United Nations.

 “These debts are essentially a dagger pointed at the heart of the economy and sooner or later that dagger is going to strike so we now sort of justify this [tax package] in the short run because nobody thinks in the long run”
- Mort Zuckerman, real estate billionaire.

"We have basically two parties, two free lunch parties, competing in a fiscal arena that is non-functional"

- David Stockman, Ronald Reagan's director of Office of Management & Budget.

Chaos in future ?

Have we entered a period of chaos in financial & commodities markets?

Christopher Laird argues that the world has transitioned from an industrial to a post-industrial economy, causing massive population shifts & job losses.

China not the economic replacement to US

He says that China will not be the economic wonder set to take over as the world's leading nation. China is not the US and does not follow the free market entreprise model of the US. China is a hybrid system of socialism/communism combined with capitalism. He thinks China's experiment with capitalism is doomed to fail, & might lead to wars over resources.

He contends that the Chinese economy is a huge bubble & growing out of control. The nature of the Chinese economy with endemic government corruption leads to wasteful allocation of resources, risking vast amounts of money at moral hazard. Examples are overbuilding of infrastructure - Ghost Cities of unoccupied buildings.

China not economic powerhouse

Christopher Laird (7 Nov 2008) : The China situation  

We hear that China has this great economic growth, still on the order of 8% a year, a number any nation would kill for. But, China needs to ADD 15 million jobs a year merely to keep up with population growth, having 1.3 billion people!

So, this 8% growth in China is mandatory, not merely a luxury since China still has 800 million peasants in the rural areas all clamoring to move to the cities for better pay. Even at the lowest levels, Chinese city pay is three times the basic rural income which is starvation wages.

And then consider that there are 130 million undocumented Chinese who flocked to the cities for work (not residents of the city) who have nowhere to go now that their export dependent economy is slowing rapidly. The recipe here is for a revolution in China if they cannot keep 800 plus million people working… and this is just beginning to happen. And this issue is widely known to scare the hell out of the Chinese government.

But, to avoid a revolution, they MUST have 8% economic growth indefinitely? That is not going to happen. The party is about over in China.

The point here of emphasizing China's demographics is that, without big exports to the West, they cannot sustain stability economically or politically. They are the poster child to what happens when the export economies slow drastically when the US export markets slow significantly.

Hyperinflation is Very Near

James Turk - Writing on the Wall, Hyperinflation is Very Near
KingWorldNews interviews James Turk in Spain
About recent gains in gold & silver :
“Rising interest rates along with the surge in commodity prices that we have been seeing in the back half of this year is writing on the wall that hyperinflation is very near. If anyone needs further proof just look at what QE2 is already doing. The Fed is turning government debt that the market doesn’t want into currency which is the cause of all hyperinflation.”

“2010 was another good year for the precious metals. Although we still have two weeks to go, gold will be up for the tenth year in a row against the dollar. The significant change this year is that a lot more people are paying attention to gold’s rise. Because we are in stage II of a bull market now, as I said, you are seeing many more people take notice of both gold and silver’s rise. The continuing talk about gold being in a bubble is complete nonsense, the stage III speculative phase is still far into the future.

The theme for the balance of this year and into next will be determined accumulation of physical gold and silver. The reason for that is that the drivers for gold and silver remain the same, monetary problems around the world. Individuals and institutions need a safe haven because of all of the monetary turmoil as well as ongoing crises. With physical gold and silver they know their money is safe.

The interesting point is that I think all of these crises are going to come to a head in 2011. So far they have been developing serially, but everything is shaping up for a big bang. The reason is that debt holders are finally waking up to the risks and demanding higher interest rates, which is something over-leveraged debtors cannot afford to pay.

So the way I see it, we need gold and silver now more than ever, which is the same message the mining shares are telling us. The strong accumulation that we are seeing in the mining shares bodes well for next year in terms of performance both for the metals, but in particular the mining shares.”

Turk is correct, we are seeing tremendous accumulation in mining shares. It’s not that the commercials can’t wiggle some of these mining shares lower in price from time to time. It’s just that the commercials & other professionals will be buying the shares from weak-handed sellers in each of those dips. This is just the reality of massive professional accumulation as we move through phase II. That’s just the way bull markets work.
James Turk on Goldseek Radio 17 Dec 2010
GoldMoney.com

States financial woes threaten whole economy

(CBS) Besides the federal deficit, another crisis looms that media has not yet focused on.

States are collectively in deficit to half-trillion dollars since recession wrecked economies & reduced their income. Their pension funds also have a shortfall of a trillion dollars.

The debt crisis is making Wall St nervous, & some believe it could derail the recovery. A million public employees could lose their jobs. Another big bailout might be needed.
 
Meredith Whitney made her reputation warning that big banks were in trouble before the 2008 collapse. Now she's warning about state & local governments : "It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the US economy."  
"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."

Her 600-page report The Tragedy of the Commons (economic parable of selfish farmers who graze sheep on common pasture till barren) released 28 Sept 2010, rates states on 4 criteria: Economy, Fiscal health, Housing, Tax.
The worst states are: 1. California, 2. New Jersey, Illinois & Ohio (tie), 3. Michigan, 4. Georgia, 5. New York, 6. Florida; & best states: 1. Texas, 2. Virginia, 3. Washington, 4. North Carolina.

Guardian 20 Dec 2010 Elena Moya :
Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe – Florence, Barcelona, Madrid, Venice: all are in trouble

Euro at risk of unraveling or modification

Expect major changes to Euro
Desmond Lachman of Washington's American Enterprise Institute, a former investment banker & IMF official, foresees a european banking crisis next year & thinks the Euro is in the process of unraveling. America should “get ready for the European economic tsunami” that could derail the US recovery.

German & French banks hold the bulk of the $2 trillion of sovereign debt owed by Portugal, Ireland, Greece & Spain.

Eurozone's structural flaw is : unlike the US, it has a single monetary policy but no common fiscal policy. This means disparate spending and tax policies among each member government.

Edwin Truman of Peterson Institute for International Economics says eurozone faces “a collective run on the financial institutions & governments”.

Significantly, the German finance minister & the head of the ECB have broached the issue of member states ceding some fiscal authority to a eurozone entity.

Europe collapse could hurt US Economy

As the European Union braces for the possibility of Greece defaulting on its debt, American Enterprise Institute resident fellow Desmond Lachman writes in his International Economic Outlook (Sep 2010), that the crisis involving Greece, Spain, & other heavily indebted European countries will only intensify in the months ahead.

Lachman asserts that intractable solvency & competitiveness issues confront these European nations as they face a choice between leaving the eurozone or implementing painful austerity measures that will only deepen their economic plight. Either course threatens Europe's already-troubled banking system & the global economic recovery.

Among the key points :

1. A substantial write-down of Greece's debt would have a major impact on Western Europe's already-enfeebled banking system. While the Greek economy accounts for only 2% of Europe's GDP, Greece's sovereign debt amounts to around US$420 billion, and a large portion of this debt sits on the books of French & German banks.
2. The combined sovereign debt of Greece, Spain, Portugal, & Ireland is around US$2 trillion, and a major part of that debt also sits on the European banks' balance sheets. France has lent the equivalent of 37% of its GDP to those countries. As much as 37% of the European Central Bank's loan book is made up of loans to Greece, Spain, Portugal & Ireland.
3. As the recession deepens and unemployment rises with no end in sight in Europe's periphery, Lachman asks whether these countries might be better served by restructuring their debts and exiting the euro.
4. From a US perspective, a deepening in the eurozone sovereign-debt crisis could threaten the feeble US economic recovery now underway. In part, it would do so by weakening the Euro against the Dollar and by clouding European growth, both of which would diminish US export prospects.
5. The more threatening channel through which it could impact the US economy would be by increasing overall financial-market risk aversion and by precipitating another global credit-market crunch akin to what occurred in the aftermath of the Lehman bankruptcy in September 2008. This is possible because global financial institutions are now closely integrated, and US banks have around US$1.5 trillion in loans outstanding to Europe.

Bonds for wild 2011

Expect volatility in government bonds

Asymmetric recovery in US

The Fed's responses to the financial crisis has contrasting effects on various segments of society. The rich have seen their stock portfolios stage a spectacular recovery, but the poor experience no apparent benefit amid job losses whilst contending with inflation.
Response to banking crisis exarcebated class chasm

Confidence in US Bonds wavering ?

Given recent debacles, investor confidence in US government debt might be shaky, and if eventually the market refuses to buy US government debt, financial catastrophe may ensue.

When the world loses faith in US Treasuries, interest rates on US Treasuries will have to keep going up until enough investors are found to buy them. Higher interest rates means higher interest on the national debt and thus greater federal budget deficits. That will erode confidence in US Treasuries even further.

A vicious cycle of eroding confidence and higher interest rates could lead to hyperinflation as the US government and the Fed flood the economy with more and more paper money to try keep the system solvent.

10 signs that Confidence in US Treasuries is dying & Financial Armageddon may be approaching
Peter Schiff: Commodities, Dollar, Interest Rates, Chinese Inflation, US Deficits

US & Europe headed for years of decline

Jim Rogers inverview on Reuters 2011 Investment Summit :
We're going to have more crises down the road.
The politicians keep delaying the problems rather than dealing with them.
Things may look better for a while, but I'm very worried about the longer term.
Both the US & Europe are headed for years of decline because of their loose monetary policies & rescue tactics.
Investment in productive capacity is what leads to long term growth.
The Pound is worse than the Dollar. 

UK is bankrupt

Jim Rogers : UK is bankrupt - merely making the situation worse slower.

Balance of Trade has been in deficit for over 25 years.
Revenues from North Sea Oil & City of London are drying up.
Britain has huge international & domestic debt.

Yet government is not cutting spending but adding to the debt : fighting wars & a generous welfare state.

Stocks good for now - huge decline eventually

MarketWatch :  Aden Forecast expects eventual hyperinflationary collapse.

However they note the Federal Reserve's ability to stave off catastrophe, in the short term.

“It's important to remember that the markets lead. They look ahead. They're not reacting to what's currently happening, but to what lies ahead and for now they're telling us that better times are coming.”

“Also important, the markets usually take a more near-term view, looking out to the next few quarters or so. And they often don't focus on the underlying fundamentals, especially when it comes to the very long mega trends, which overpower the near-term trends. But megatrends take years or decades to evolve. In the meantime, other factors will come to center stage, as we're currently seeing [with Fed stimulation]”.

Right now Aden thinks near-term trends are positive for stocks :
“This positive action will be further reinforced if the Dow Jones Industrials also reaches a new high by rising and staying above 11,440”.

However Aden see signs of the megatrend impacting bonds :
“Bond investors are seeing inflation ahead and there's a good chance the bond bubble is coming to an end”.

Aden thinks the megatrend has definitely arrived for Gold :
“The gold price is incredibly strong above $1,340 and as long as it stays above this level, we could see higher prices. A decline to the $1,300 level would take the froth out of the rise, but even then it would only be an 8% decline. The point is, a 10-15% correction would actually be healthy, but times are not normal and we must watch it closely.”

Their forecast for stocks in the longer term are bleak :
“We expect gold to continue higher in the years ahead as its mega rise evolves, stocks probably won't. At some point, we suspect the rise will stall and it's quite possible that the sideways action since 2000 could end up being a big top that precedes a huge stock market decline.

Time will tell. But this is a scenario that cannot be ruled out considering the big picture fundamentals, like the debt load and its repercussions in the years ahead.”

Gold vs Silver : which to buy

Kurt Brouwer's Fundmastery blog MarketWatch Dec 12, 2010

When comparing gold to silver in terms of value, the Gold-Silver Ratio is a good tool - comparing the price of an ounce of gold to silver. Over the last 10 years, GCR has swung widely between a high of 80 to a low of 40.

Source: Bespoke Investment Group

Dividing the current price of gold ($1,385) by silver ($29) yields a ratio of 48. It measures the relative priciness of silver compared to gold.

The chart shows low of 40 since early 1980s. The upper end is about 80 (barring the odd spike >80 in early 1990s).

When the price line is heading up, it means GCR is widening – thus gold is relatively more expensive. When the price line moves down, it indicates silver is becoming more expensive relative to gold.

Or, when the line is rising, gold is outperforming silver, & vice versa. When the ratio hit 80 silver started to outperform, & when the ratio hit 40 gold started to outperform.

For the last 6 months, GCR has trended down from high 60s to about 48 now.

If history is a guide, this indicates silver is getting overbought versus gold.

Gold vs Silver - Bespoke Investment Group

-----------------------------------

Gold & Silver demand up 

Gold's recent rise is believed to be due to Chinese demand for the precious metal amid uncertainties over the economy & inflation fears. Following the Fed's QE2, investors are concerned European central bankers could similarly resort to Quantitative Easing, thus driving demand for Gold & Silver as the traditional inflation hedges. 

China might be buying gold for :

1.  Hedge against Inflation

2.  Alternative to US Treasuries

3.  Loss of faith in paper currencies

4.  Preparing for coming Financial Collapse

Eurozone near insolvent

Nouriel Roubini fears Eurozone's problems with insolvent or nearly-insolvent countries in it, may not just be liquidity but also the huge debts in the private sector & banks.

Backstopping of the financial systems by governments has made them near-insolvent – so the provision of liquidity might not be sufficient. Eventually, there might be forced restructuring of public debt for Greece & Ireland.

Problems are spreading to Portugal, & possibly Spain, and perhaps to other parts of eurozone.

Competitiveness is another problem.

Furthermore, there is restoring of large stocks of public debt and also private liabilities owned by organisations.

Hyperinflation in 2011

John Williams of Shadow Stats predicts hyperinflation for America in 2011, sparing Canada & Australia

Dollar & Euro collapse scenario

What if Dollar & Euro both collapse ?

Avoid Stocks till Banks crash

Stocks are sucker bets against a rigged insider's game.
Avoid buying stocks for the next decade.
Wall Street Banks will trigger the next meltdown, causing mass bankruptcy.

10 reasons to shun stocks till banks crash :

1. American stocks are a high-risk sucker bet
2. New 'big short' ahead : Derivatives con game will crash again
3. Hedge funds shorting China : warning - US faces collateral damage
4. New insider trading indictments killing Main Street confidence
5. Bankster's perfect gambling record proves stocks a rigged game
6. Wall Street is socially worthless, existing only to make insiders rich
7. The Fed is America's worst nightmare, a $3.3 trillion moral hazard
8. Wake up to a new normal : no growth, deflation
9. Privatize Social Security : new GOP Congress loves dumb ideas
10. Warning : Wall Street will lose another 20% of your money by 2020

Euro crisis threatens Financial Armageddon III

Christopher Laird : Rapidly escalating Euro crisis threatens Financial Armageddon III
In Fall/Winter 2007, then a year later in Fall 2008, the general bank crisis spreading first in US banks with the Bear Sterns and Lehman failures led to two almost total world bank collapses.

Now the world faces the 3rd challenge in the form of the EU bond crisis.

The 1.2 trillion Euro rescue package during the Greek crisis isn't working, & EU pledge of $110 billion aid for Ireland has litlle effect.

With the Euro breaking down, France & Germany are in a quandary over what to do. If they agree to more bailouts, investors barely yawn. Then the selling begins anew.
If the EU decision makers, including Germany especially, don’t do more bailouts, and try to get investors to take losses, then the bond markets will dump the troubled countries’ bonds. Germany & France and the EU proponents are in an impossible situation.

What is that situation and how bad is it for the Euro?

Markets are now facing their worst sovereign debt crisis, centered in the EU, since WW2. The IMF and other authorities are saying they are facing many of the same bank and credit collapse situations they faced in the 1930s - a banking and solvency crisis.