Please have a look at this Yen Aug 2010 to 2011 

GOLD  

Long term I do not believe the market has topped. For one thing let’s consider other commodity markets’ tops, whether it’s gold in 1980, crude oil in 2008: the last wave up is always the steepest as wave 5 of a commodity rally is always driven by panic due to lack of supply. There are fears in the market, but I don’t think we have seen panic at all. Panic will come after the Euro is disbanded, if Japan defaults, or the USD loses 10% in one week, but certainly not on fear of inflations with a CPI which is still going to be negative YoY by December (I do not give any credibility to CPI when it comes to measuring real inflation, but it’s the benchmark…).

Support is at hand time to start adding a bit more to the gold holdings  . . . 

Quote of the month: Bob Hoye

“In noting the exceptional corruption of central banking, it is always ironical to consider that in this bizarre financial world the worst thing that can happen is an “outbreak of sound money”. 

China

Of the Middle Kingdom’s 1.3 billion citizens, only 60 million earn a $20,000 middle class annual income, while 440 million make $3-$6/day and 600 million take in under $3/day.

S&P

Think we are going lower . . . say 800 on the S&P ?

Is it Time?

Shorting the world’s most overvalued asset, the 30 year US Treasury bond, should be the big trade from here. What will be different with this meltdown is that it will be the first collapse in history of a bond market in a non-inflationary environment.

It is not soaring consumer prices that will execute the long bond. It will be the sheer volume of debt issuance. The Federal Reserve have to sell nearly $2.5 trillion of debt to cover a massive budget deficit and refund maturing paper, easily the largest cash call in history. Bring in a double dip recession and a second, larger stimulus package, and those numbers take off considerably.

Pile on top of that trillions more in offerings from states and municipalities that are also hemorrhaging debt issuance. By the end of 2010, total government debt from all sources will rocket to a staggering 350% of GDP. Throw in private debt requirements, like the rolling over of a trillion dollars worth of commercial real estate financing and your garden variety corporate offerings. The rush to borrow has started overseas too, with hundreds of billions of dollars more in Eurobonds floated by cash strapped sovereigns like the PIIGS. It’s clear that the bond markets of all descriptions are going to become very crowded places, driving rates irresistibly higher.

At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current, ridiculously low 4.10% to 5.5%, 6%, and higher. Even Moody’s is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever.

ProShares UltraShort 20+ Year Treasury or TBT is a 200% bet that long bonds are going down. It has clawed its way back up from $34.80 to $37.15 since has fallen to a low of 29.77, compared to the $70 it traded at in 2008. Falling interest rates have a silver lining in that the annual cost of carry for this leveraged ETF has dropped appreciably, from about 10% to around 8%.

If short interest rates double from the current levels, a virtual certainty, so does America’s debt service, from the current 11% to 22% of the budget. This could happen as early as 2014.

If I’m wrong on this and the 30 year yield surges under 2.5% in some sort of second Great Depression scenario, the TBT will drop down to the mid $20’s. If I’m right, the final target could be as high as $200, when long rates top 13%. That’s where they were in 1981. If you want more then take a look at the 3X short ETF (TMV) with its higher cost of carry.

Let me run some numbers here. If the yield on the 30 year Treasury bond runs up to last year’s low of 3%, the TBT will fall to a new all time low of $27. If I’m right, and we move back up to the 2010 high of 5.05%, the TBT pops back to $51.50. Running a downside risk of 11% to capture a potential gain of 68% sounds like a pretty good risk/reward ratio to me. But it might get better. Don’t forget that our long term, multi-year target for this ETF is $200.

If the futures players get this right, a move in the December long bond (ZBZ0) on the CBOT from today’s high of 134.5 to this year’s low of 111.50 multiplies your minimum margin requirement from $3,375 to $23,000, a 6.8 fold return.

But wait, there’s more! If you don’t feel like making big bets until you figure out what the new normal looks like, try a limited risk position through the TBT options. The March $30 strike calls are trading at $4. A run up by the ETF to this year’s high puts these babies at $21 at expiration, a net profit of $17, a gain of 425%.

I’ll tell you some key targets to watch for to determine the timing on this: when the yen approaches \80, the S&P 500 touches 950, the 30 year yield tickles 3%, and the ten year yield slams into 2%, it will all be over but the crying. I’m still keeping my powder dry for taking another shot at this trade, but my trigger finger is getting mighty itchy.  So is it time, no not yet but it is something to watch as this will be a great trade at the correct entry point. . . which is coming soon.

RARE EARTH METALS:  

Bloomberg reports that China is cutting back 72% of its exports of Rare Earth metals. China has said that environmental issues are the reason for the cutbacks.

72% drop in availability of any commodity is important. RE’s are important. I am no expert in this but I believe that RE metals are needed in most things we make and consume. From cars to cell phones. Some more informed comments on the importance of RE would be most welcome.

Japan and the US are already protesting the ban. The rest of the world’s manufacturing base will soon follow. This could become an interesting row.

And all those folks were saying that China would be the world’s economic growth engine. Humm not so sure.

 Call to find out how these can all be added to your portfolio 03 5724 5100

Warren Buffet is a great example of how to avoid these two emo­tions in our investing decisions and has two great quotes regarding this topic that I think are very appropriate, given our current market conditions.

The first quote goes like this:  “Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.”

And the second one:“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Deflation Next?

One of the concerns of both the financial markets and the Fed is the prospect for near term deflation in the economy.  Deflation can occur when consumers begin to forgo current consumption due to their expectation that prices will fall in the future.  This in turn can lead to lower investment by companies that refuse to commit capital to their businesses because of their expectation of a low rate of return due to lower prices.  This creates a vicious cycle of both falling consumption and falling investment known as the “deflationary spiral.”  This cycle can become very difficult to break out of once it takes hold, as evidenced by Japan in the ‘90s.  The Fed clearly understands this and the potential downside risks of deflation.  In addition, the market will begin to look for signs of deflation and will anticipate steps that the Fed will need to take in order to prevent it.  This, we believe, is one of the reasons why the U.S. Treasury market has rallied so strongly and will continue to do so in the near term.  While the initial move in May could be attributed to a short term flight to quality, the most recent move lower in yields appears more long term in nature.  One explanation for this is that the market is becoming aware that the economy may be entering a deflationary spiral and that the Fed may move long term rates lower through additional Quantitative Easing (“QE”).  Since short term rates are already hovering near zero, QE is one of the few mechanisms left that will allow the Fed to provide further monetary stimulus.

Global Warming

NASA has found that methane is 33 times more potent than carbon dioxide in causing global warming.

Many scientists have said that methane releases have caused past warming spells. See this, this, this, this and this. Indeed, methane has such a powerful effect on climate that scientists believe that woolly mammoth farts gaseous emissions are responsible for warming the Earth 13,000 years ago.

Guess what is streaming into the Gulf of Mexico along with the OIL. . . Tremendous quantities of methane are being emitted by the Gulf oil spill.  The methane could kill all life in large areas of the Gulf. However, rumors being spread widely around the Web claiming that the methane could bring on a doomsday catastrophe are not credible. 

Yet . .  only time will tell.

     if you have Yen sitting in the bank, it is time to move and take advantage of the current exchange rate  . . . call 03 5724 5100 we can help.

The market in quick format:

Gold ETF GLD – Daily Chart
Gold has formed a large cup & handle pattern. It has held up well during the recent weakness.

But zooming into the intraday charts I do have some concerns about a sharp sell-off in the very near future.

 Silver ETF SLV – Weekly Chart
This is a weekly chart and goes all the way back to 2008 showing a very large cup & Handle. We could technically still see silver trade sideways for several months before it reaches the apex and is forced to breakout in either direction. The upside potential for a cup and handle pattern is 100- 300% of the height of the cup. So this means $1450 gold and $29 silver using the minimum potential.

Crude Oil Fund – Weekly Chart
Oil formed a triple top over the past 10 months and has started to head south. We have seen selling volume drop during the test of resistance which is not a good thing.

SP500 ETF SPY – Weekly Chart
The SP500 along with several other indexes have formed a head & shoulders patter and appear to be in the process of breaking down through the necklines. If this unfolds then we are looking at much lower prices for stocks.

 Get in touch if you have any questions 03 5724 5100

Ever Wonder…

Why the sun lightens our hair, but darkens our skin? Why is lemon juice made with artificial flavor, and dishwashing liquid made with real lemons? Why is the time of day with the slowest traffic called rush hour? Why is it that doctors call what they do “practice”?  Why don’t sheep shrink when it rains? Why isn’t there mouse-flavored cat food?  Why are they called apartments when they are all stuck together?  If con is the opposite of pro, is Congress the opposite of progress? If flying is so safe, why do they call the airport the terminal?

• how to make the right decisions without panic,
• which asset classes are now safe and cheap,
• which investment mix is recommended by experts,
• everything you need to know about equities, bonds, real estate, gold

 Q: is hyperinflation on the horizon?

A: historically, hyperinflation arose after wars and destruction. Right now central banks have to be cautious to collect the printed money on time. This is especially important as the economy grows again, stabilizes, and credit is passed on to businesses. With more credit creation more money enters the system. As long as industrial capacities are low and wages don’t rise there is not much risk of hyperinflation. However, does China have overcapacity?

 Q: what happened to the various asset classes during times of inflation in the 20th century?

A: 1914-1923, after WWI hyperinflation in Germany; equities held up but lost up to 90% in USD. Only gold and real estate survived the crisis well.

1929-1932, deflation, equities fell (S&P minus 85% until mid 1932); government bonds only briefly under pressure in 1931; savings and life insurance policies held up, gold and real estate rose in value.

1939-1948, WWII, equities, bonds, savings and life insurance policies mostly devalued; investors who held on to their equities could make up for the losses during the post-war boom time. Gold was no.1. A lot of real estate got destroyed by bombs but those not destroyed later very much increased in value.

Q: do I need to change the funds in my regular savings plan?

A: during times of inflation bond funds will fall in value, a better choice are equity funds; best are mostly crisis immune companies like food companies (people need to eat), or other companies who can pass rising prices on to customers. Historically, equities outperformed during times of inflation.

Q: Do I have to save more for retirement if inflation is on the horizon?

A: Yes, as the rise in prices undermines the real value of your nest-egg. The higher the inflation rate and the further you are away from your retirement age, the more impact inflation will have on the real value of your nest-egg.

Q: To what extent will inflation devalue my money?

A: example: a payment/maturity value of 100,000 in 20 years down the road sounds good, but at 2%pa inflation will only be worth 67,000, at 4%pa only 46,000. If you want to have 100,000 in 2030 you already need to put away 219,000 today. This means you always have to increase your savings. One method to do this is to increase your savings rate every year by a set percentage.

Q: Are my savings safe?

A: Cash savings will surely make you poor, as interest rates are below the rate of inflation. Sitting in Cash is the worst investment as inflation slowly (or quickly) steals your buying power.

 Q: Does real estate protect from inflation?

A: real estate are hard assets and inflation is priced in so the value will rise. But it can only work if the real estate market is functioning, i.e. especially with a longer term view real estate makes sense and if the demand is there – through higher incomes, favorable borrowing rates, good locations and demographics.

 Q: should I buy real estate for my own use or to rent it out?

A: depends on your life plan, both offer protection from inflation. As an investment/rental property location is crucial and you should only buy if you know the local market.   There are good assets and bad assets – simply put an asset that pays for itself is a good asset! All real estate works within a formula on whether it is better to buy or rent.  The market is still digesting debt and this will play out on house prices worldwide.

 Q: is now a good time to buy?

A: maybe, because of low rates and possible inflation. About  54% believe that buying property now is better than any other investment to preserve wealth. And almost 90% see real estate as an important part of their retirement planning. But nobody should buy out of panic. Those who couldn’t afford to buy before the crisis won’t be able to afford this now. Crucial is timing and location and affordability.  

However, we think waiting till 2011 may be a good strategy as there are a lot of debts to be refinanced. Not just in America! Australia with $581 billion of it’s foreign debt owned by private sector financial corporation’s (see the bottom of page 60.) Worse still, nearly $500 billion in foreign debt has a maturity of 90 days or less, meaning any large and sustained disruption to global credit markets would require some kind of local solution. This concerns us in Australia.

 Q: should I accumulate a lot of debt?

A: this seems tempting as inflation also devalues debt. Example: a loan of 200,000 over 20 years at 4.75%pa will cost 310,000. With inflation of 0.7% the cost will decrease to 289,000. At 2% inflation the real cost will fall to 258,000, at 3% to 236,000, at 5% to only 199,000. But be careful: the level of debt needs to match your level of income. If you have rental property you need to keep in mind that there might be vacancies and hence no income.

 Q: can I invest in property with small amounts of money?

A: yes, via real estate equity or property funds by buying units regularly via a savings plan.

 Q: will an investment in gold protect from inflation?

A: yes, gold doesn’t pay an annual dividend but is a real asset that prices in inflation. In times of one crisis after the other and lots of money printing more investors, individual and governments, are interested in gold. It is generally true that commodities prices rise when money flow increases.  There are also some very innovative funds available, one such fund is up over 11% in the last 4 months.

 Q: the price of gold went up substantially, does it still make sense to buy now?

A: yes, gold is not yet scarce but is also not available ad infinitum. There is a lot of demand from institutional and private investors right now. Of course the price can always fall temporarily, but long term gold is a safe and capital preserving investment. It’s more like an insurance than an investment in the classic sense. Therefore you shouldn’t invest all your money into gold. Most experts recommend 5 to 15% and careful investors buy in stages rather than all at once at one price. 

 PDF – a decade of appreciation in GOLD.

 Q: what is the easiest way of buying gold and what should I be aware of? 

A: one way is via ETFs, you can buy and sell daily.  Advantage is that you don’t have to think about storage and storage fees.  But be careful as not all ETF’s are the same, make sure they have physical gold not paper.

 Q: what about gold equities?

A: this is indirect protection from inflation as they mirror the development of gold mining companies and not only the gold price. So there is risk in regards to how well the companies are managed but on the other hand company earnings can also rise much faster if the companies manage to operate at low cost. When in doubt bigger companies like Barrick Gold, Newcrest Mining, Gold Fields are favorable. To minimize risk buy a gold fund, e.g. BGF World Gold or GDX or GDXj.

 Q: how do equities behave during inflation? which are most attractive?

A: equities are also real assets. Experts recommend equities of companies that are asset rich, i.e. companies with e.g. production facilities, machines, factories, real estate; these are real assets that protect from inflation. This means less e.g. servicing and software companies but rather old economy companies that actually make things! Equities held up much better than bonds.

 Q: what other real assets are there besides equities, real estate and gold?

A: if you have the money you can invest in famous art. Right now the work of young artists is also booming. Or classic cars, e.g. Mercedes, Porsche, Ferrari. Or expensive watches like Rolex. Jewelry, Diamonds, Rubies, Emeralds, Opals etc.

 Q: shall I invest in government bonds?

A: probably not. When rates rise prices will fall. Rates are at record lows right now so will probably rise. If at all invest in short term bonds over 1 to 2 years.

 Q: what about inflation protected bonds?

A: right now is probably a good time. Once expectations of inflation increase worldwide prices will become expensive.

 Q: how do I best invest my wealth if I am afraid of inflation?

A: real assets or inflation protected interest rate instruments. Banner’s recommendations for investors e.g.: 30% int’l equity (including gold equities), 20% hedge funds, 10% Real estate, 20% int’l bonds/ inflation protected bonds, 20% commodities/ Energy. More aggressive would be to dump the bonds and increase gold.

 Why this time things are different this time?

1.  Different because every weak member of the euro is and will be lambasted by the rating agencies, the IMF and the CDS tool.
2. Different because California, larger than any of the weak euro members, is heading for bankruptcy.
3. Different because the US dollar claims strength by basking in the euro problems, not because it has fundamental value for price.

Our calls for currency and debt crisis have been good, perhaps a bit early. 

We ask you two questions: 

1. Do you think a few trillion dollars of new debt and money printing will turn things around?
2. Do you think various politicians worldwide can save us all from this, with more debt?

 If you believe they will, then we guess buying the Dow on the dips makes sense, and we wish you luck.

We also ask you this: Why take a chance? If we are wrong, it won’t hurt too much to stay heavy in gold and energy until it’s clear which way things are going. But if we are right, betting the other way will cost you dearly. 

One thing we are certain of as can be: the fear permeating the markets today isn’t going to dissipate soon, even under the best of circumstances and the most rosy economic news imaginable. Nor will it vanish quickly once it does start dissipating.

That is very bullish for gold. So even if there’s no crash, even if the economy doesn’t come unglued, sticking with cost averaging in to gold,  gold stocks and energy should work out well.

It is a measure of the powerful positive sentiment currently driving the market that each successive concern is readily dismissed. Dubai World debt problems? They are rich, they can cover it. Greek debt? It is a small country, someone will bail them out. Breakdown of the Euro zone? It will probably be better to lose a few countries anyway. China property bubble? The authorities can contain it. And Goldman Sachs malfeasance? Well, that is probably the least surprising and least concerning of the lot, assuming you do not own GS stock! 

But all these issues have one thing in common. They are the result of excessive debt and leverage. Debt is useful and productive up until a point. As long as the underlying asset generates enough cash flow to service and gradually pay down the debt, all is well. But when the underlying asset suffers a decline in cash flow, the party is over. Debt servicing becomes harder and default eventually occurs. 

Governments around the world realize this and they have (so far) offset the effect of contracting private credit by running huge budget deficits. Ironically enough, equity markets are the main beneficiary of the increase in government debt so it is no surprise that investors are showing no signs of concern. The International Monetary Fund (IMF) is not so sanguine though. In it’s just released Global Financial Stability Report the IMF asks, could Sovereign Risks Extend the Global Credit Crisis’. 

“The crisis has increased sovereign risks and exposed underlying vulnerabilities. The higher budget deficits resulting from the crisis have pushed up sovereign indebtedness, while lower potential growth has worsened debt dynamics. For example, G-7 sovereign debt levels as a proportion of GDP are nearing 60-year highs. Higher debt levels have the potential for spillovers across financial systems, and to impact on financial stability.” 

The chart below shows G7 sovereign debt levels as a proportion of GDP. Note the spike higher from 2007/08. Now, many will look at this chart and say so what, we have been here before. While that is certainly the case, there is one crucial difference. In the 1950s and 1960s debt levels were falling from the excessive levels built up during the aftermath of the depression and the Second World War. On the plus side, private debt levels were tiny and as nations recovered from the Depression and war, increased credit flowed to the private sector. 

More to the point, most of the increased credit was used for productive purposes. Banks hadn’t invented mortgage equity withdrawals or subprime loans yet, so loans tended to be for production rather than consumption. It is not surprising therefore that the US golden period was during the 50s and 60s. 

But the global economy is now in a position of high government AND high private sector indebtedness. Because governments are quite good at spending other people’s money, we expect the sovereign debt ratio to go much higher in the years ahead as an offset to contracting private sector credit. But like other concerns before it, equity markets around the world just don’t seem all that worried by 50 year high government debt levels. Nor does the bond market for that matter. In our experience, investors don’t care about such trivial things as housing bubbles, sovereign debt defaults, or currency breakdowns until they have to.   Source: Sound Money. Sound Investments.com

We strongly believe caution is warranted.

Are we in Deflation or Inflation?  

 The Bond Markets tell us Inflation is dead there are numerous articles telling us so, even Ben Bernanke!  It must be true!

 So what should you do – conventional wisdom says this:

Investment Themes For Deflation

• In deflation, debt is the enemy.
• Risk is to be avoided.
• Cash is raised.
• Treasuries are sought out as a safe haven
• CD ladders offer a good investment structure.
• Gold, acting as money does well.
• Select equity shorts or Puts are a standout.
• Renting as opposed to owning a house should be considered.
• Currency plays.

 Investment Themes For inflation

In inflation the last place one wants to be is in cash.

• Commodities in general are a standout.
• Gold is a standout.
• Precious metals are a standout.
• Property is a winner.
• Equities are a winner.
• Treasuries are distinct losers if not outright shorts.
• Foreign currencies
• Energy a winner

Looking at the above two scenarios we have bits of each doing well.

Deflation in economics is a persistent decrease in the general price level of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money – a negative inflation rate. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation.

Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.

Disinflation is a decrease in the rate of inflation. This phase of the business cycle, in which retailers can no longer pass on higher prices to their customers, often occurs during a recession. In contrast, deflation occurs when prices are actually dropping.

To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the supply of money which resulted in an increase in prices. But, in more recent years, the word inflation has come to mean the result rather than the cause. i.e. an increase in prices rather than an increase in the supply of money. This might be partially the result of the wide spread usage of the term “inflation rate” which measures the rate of price increases rather than the increase in the money supply.

Disinflation on the other hand is a more recent term and so only has the connotation of moderating prices i.e. prices that are not increasing as quickly as they once did. For example if the annual inflation rate one month is 5% and it is 4% the following month, prices disinflated by 1% but are still increasing at a 4% annual rate.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008.  But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong.  When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand.  If money didn’t drive it, then it isn’t deflation.

Since the commodities slide started in July 2008, annual MZM growth on a weekly basis has averaged 11.6%.  It never shrunk!  If the broad US money supply always grew by at least 9% over the period of these sharply lower prices the deflationists cite, and averaged 12% to 13%, then how on earth could the stock slide or commodities slide be deflationary?  Prices didn’t fall because there was less money available to spend on stocks and commodities, but because demand plunged relative to supply.

Deflation is exclusively monetary in nature.  And since mid-2007 when the general credit crunch started unfolding, the Fed has grown broad money by the fastest annual rates seen since the aftermath of the 9/11 terrorist attacks.  This fact is indisputable.  Without a shrinking money supply, negative growth rates, there is no basis for declaring deflation.  Redefining “deflation” to mean something it is not doesn’t make it so.

AS a result we think INFLATION is coming . . . 

Inflation is Dead – what utter hooey.

The Alternate CPI puts the annualized inflation rate at 9.47%. (Data from www.shadowstats.com).

For a fascinating perspective on inflation and the adjustments to the official calculation method, watch this from Chris Martenson.

Now when you consider the inflation figures Washington puts out each month, the March’s Consumer Price Index (CPI) data; the “core” inflation rate rose a modest 0.1%. So every politician and most of Wall Street analysts point to it and proclaim that inflation is dead.

Inflation? “Not a problem” … “tame” … “easy to deal with” — those were some of the comments and headlines that came out after the figure was released.

I disagree just have a look at what is happening around you – what is cheaper than last year?

Here are just a few examples … of everyday things that are going up

• The price of oil is up over 50% from a year ago. In April 2009 it was $50 a barrel now it is $84!
• A gallon of unleaded gas is up 15% since April last year!
• Cotton is up 30%
• Copper prices are up 57%

Now, you tell me, is that 0.1% inflation? I don’t think so! The average price appreciation of the above, which are pretty much staple items, is over 10%.

That’s even a bit higher than the action we’ve seen in the Commodity Research Bureau’s Index (CRB Index) of 19 widely-traded natural resources and commodities. According to the index, prices of raw materials are up nearly 8.5% since the beginning of February.

And don’t get me started on College tuitions as are projected to increase into the double-digits in many cases for the 2010-2011 school year.

Government around the world are massaging figures – protect yourself and start your own Personal Savings Plan today as now is the time for DIY.

You Can’t Ignore Inflation: The 2008 stock market panic sent stock and commodity prices – including the price of oil – into a tailspin. And that launched the big debate about whether inflation or deflation would ultimately carry the day. Keep in mind that since 2001 – under benign price inflation of roughly 2.5% – gold has managed to rise about 400%. Meanwhile, the U.S. Federal Reserve is widely expected to keep short-term rates near zero through this year, leaving the door open for inflation. In addition worldwide, central banks have rolled out an unprecedented $12 trillion worth of stimulus programs, with some of the money still to be spent.  Inflation is coming just don’t know when . . .

Inflation explained: When the economy goes down, people save more. When that happens, circulating M2 (money) also goes down because less people are spending. That would make the economy even worse, so what the government does, is it borrows money from the Fed, which makes money out of absolutely nothing, and then lends it to the government at interest.  Then this new money sort of replaces the saved money, and the recession should hopefully not get worse. 

Then, once things are better, this new money which eventually floats around is deposited at banks. Banks then use this as high powered money to create more money from thin air. About 90%, so, you deposit, $10,000, the bank can lend $9000. This isn’t YOUR $9000, it is brand new money. Your $10,000 is still there, this process doesn’t end there. Now there is $9000 of new money in the economy. That then gets deposited at another bank. Now that bank can lend $8100, and so on until about $90,000 is effectively created out of thin air!

That’s why the bailout of $700B will eventually reach about $7 Trillion. (This will expand the money supply around 30% to 50 %.) The money hasn’t been “unlocked” yet (banks are not lending).  So, once the economy picks up again, and it’s going to need employment for the money to be unlocked, we could see a lot of inflation; maybe even 10% a year for a few years.

Investment Demand is out there: Large institutional investors – hedge funds and pension funds – are making large allocations to gold, as are individual investors.  The proliferation of gold-focused exchange-traded funds (ETFs) bears this out. The SPDR Gold Trust (NYSE: GLD), the world’s largest physically backed ETF with 1,100 tons of the lustrous metal, is the sixth-largest holder of gold bullion. Individual investors have never had an easier avenue for owning gold. (However maybe this is not the best way as it is not 100% backed)

Asia, with a population that exceeds 2.5 billion inhabitants and a long-standing cultural affinity for gold, is stoking global demand in a big way. China is encouraging its citizens to buy gold and silver.

Central Banks are Becoming Net Buyers: India’s recent purchase of 200 tons of International Monetary Fund (IMF) gold was the likely impetus that pushed gold up over the $1,200 level in December. But more important is the sea change that has seen central banks change from net sellers into net buyers of gold. BlackRock Inc. one of the world’s largest investment managers, said that 2009 was that turning point. If that was the case, it will have been the first time in 20 years, as central banks have been net sellers of gold since 1988.

A Currency Crisis is Looming: The “PIGS” – Portugal, Italy, Greece and Spain (or “PIIGS,” if you want to include Ireland) – aren’t in very good fiscal shape. And they aren’t alone. Iceland has already gone over the edge. The United States, the United Kingdom, and countless other economies are struggling. And that reality has ignited a crisis of confidence about fiat currencies in the minds of many investors. Money is nothing more than paper and ink, backed by the full faith and credit of the issuer. When investors find that their faith in the issuer is shaken, the value of that currency erodes. Additional sovereign-debt downgrades from ratings agencies are but one potential trigger of a currency crisis. Under such conditions, gold – the ultimate store of value, and the oldest existing form of money on earth – will soar as investors seek to protect their purchasing power.

We’ve Yet to Reach the Mania Stage: the gold bubble that takes prices to all-time-record levels will inflate in three distinct stages. This process will start with currency devaluations in Stage One, will be fueled by growing investment demand in Stage Two and will experience its stratospheric ascent in Stage Three, the mania phase of this evolution.  Keep in mind, the entire gold industry has an aggregate market capitalization (value) below that of Wal-Mart Stores Inc. (NYSE: WMT) alone (currently about $210 billion). So as the crowd piles in, the “big money” to be made will lie with gold explorers and producers, where 1,000% returns will not be uncommon, even from today’s prices.

All these fundamentals underscore that gold prices have plenty of room to run from here.   All the physical gold in existence is worth somewhat more than $1 trillion US dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels.

It’s Time to Make Your Move

Everyone needs some exposure to gold in their portfolios, no matter their age or risk tolerance. Owning some physical coins or bars makes sense.

When will gold really take off? I think it will take a few years. But with bubbles, or speculative frenzies, one never knows. Just this week, in fact, Robert R. McEwen, the chairman and chief executive officer of U.S Gold Corp. (AMEX: UXG), predicted that gold could more than quadruple to hit the $5,000 level by 2012. Some experts have labeled this expected move as a looming “super spike.”

Despite the mania stage (we think) is still several years away, the wise investor recognizes both the importance and the potential of investing in gold.

I have no doubt that today’s $1,100 gold price level will eventually, in hindsight, look like an outrageous bargain.

WAYS TO OWN GOLD

There are many ways to own gold. The best way is to buy a few one-ounce gold coins, preferably American eagles if you’re in the United States, or Canadian maple leaf coins if you’re in Canada. With one-ounce coins, you pay the lowest commission.  The trouble with gold coins is also their advantage: they are in your possession. They can be lost or stolen. They must be mailed back to a coin dealer to sell them for money. There are commissions to pay. But, in a time of national crisis, coins are the best way to hold gold for the small investor.

You can buy gold shares – a very good idea. This is the standard approach of most investors an easy way would be with GDX or GDXJ – exchange traded funds.  There are gold miner shares on almost every exchange.

There is a Fund which invests 60% of its assets into physical gold the other 40% is invested in Managed futures which since 1990 has achieved returns of over 17% pa.

There is a fund, the Central Fund of Canada, that holds mostly gold and some silver bullion. The prices of the two metals move in tandem most of the time. Owning shares of this fund is a surrogate for owning physical gold. This is far better than GLD as there you are buying paper and not all the gold is actually there!

Always remember: if there is no proof of physical possession of gold, and if there are no storage charges for gold held in reserve, then you may be trading a futures contract, which is a promise to pay gold on demand. Promises to pay are never as reliable as gold in hand. Third-party verification of gold held against receipts issued for gold becomes important.

You should ask yourself what you are hedging against. Answers include the above fundamental reasons in the report, plus these more specific ones:

• Dollar inflation/depreciation
• Terrorist attack on the U.S.

• Crisis in the bank payments system (cascading defaults)
• Speculation: Asians may start buying gold

WHAT IS THE DOWNSIDE RISK?

The standard ones are these:

• Net central bank sales of gold to public
• Recession reduces price inflation
• Recession reduces demand for commodities
• Asians turn out to love paper money more than gold
• Governments outlaws gold  
• Gold-owning people actually obey the governments

The political pressure is very strong to keep a higher price of gold from identifying reduced confidence in the dollar. We have seen the government take steps to push down gold’s price. But the government also sells gold coins. It maintains the official position that gold is not relevant for monetary affairs. To outlaw gold would be to admit that gold is relevant. This might turn into a gold-buying panic. Because people can easily buy and sell gold on the Web, there are ways for people to evade the law.

A worldwide recession is possible if China suffers a major recession. China at some point will have to go through a recession because of today’s inflationary policies. But the question is: When? Gold may fall 30% from $1,100 an ounce if it does buy some more. If you have no gold, it’s not wise to bet the farm on a fall in price. Besides, if gold falls, you’ll probably think, “It’s going to fall even more. I had better wait.”  The Greece situation is the next thing to happen will they or will they not be bailed out, but really the bigger situation is who is next as Greece is about as relevant to the European economy as say Utah is to the USA.  Now what happens when California needs a bailout it is the 8^th largest economy in the world on its own. Then longer down the line there is Japan the third largest economy . . . and in the end the USA.

CONCLUSION

People postpone doing what they don’t really want to do. They don’t want to take action that implies that the present system is shaky, that the government is following policies that will debase the currency, and that there is no way for the government to preserve the purchasing power of the dollar by anything other than ceasing all monetary expansion, which the Federal Reserve System never does.

New Home Sales at Record Low

The Census Bureau reported that sales of new single-family homes in February were at a seasonally adjusted annual rate of 308,000. This is a new record low and a 2.2% decrease from the revised January rate of 315,000.

Some attribute the record low sales to February’s weather, which covered much of the country in snow. Others contend that the new home tax credit that was originally supposed to end last year merely moved sales that would have taken place this year to last year. In my view, both factors likely played a role in the February figures, but it’s clear from this chart I found on www.calculatedriskblog.com that the housing market is still in deep trouble.

And in case you think we may have finally reached the trough of the housing crash, I’d like to remind you about the overhang of ARMs (adjustable rate mortgages) that is due to reset over the next two years. There’s a lot of default on the horizon and the market will tank further.

The national debt of countries represents how much money the government of that country owes. Like a household budget, national debt gets larger when a government spends more than it takes in. This can continue for years, or even decades. This budget deficit is the total amount of this debt that has grown over time, with interest charged adding significantly to the amount owed by the government.

The amount owed varies greatly with the amount of money a country generates, its population and how much its government spends. In Germany, the national debt is $1.79 trillion. This represents 62.6 percent of Germany’s gross domestic product, or GDP. In The U.K. the national debt is $42.2 trillion. This is 47.2 percent of the GDP of the U.K.

In Russia, the national debt is $151.3 billion. This is 6.8 percent of the Russian GDP. Italy owes a national debt of $1.89 trillion, or 103.7 percent of the Italian GDP. The national debt of France is $1.40 trillion. This is 67 percent of France’s GDP.

One of the highest levels of national debt relative to the country’s GDP can be found in Japan. The Japanese national debt is $7.47 trillion. This is 170.4 percent of the Japanese GDP. India has a national debt of $2.55 trillion. This debt is 78 percent of the GDP of India. Zimbabwe has a national debt of $472.51 billion. This level of national debt is 241.2 percent of Zimbabwe’s GDP.

In the Americas, The United States has a national debt of 8.68 trillion. In the U.S., this is 60.8 percent of the American GDP. The Canadian national debt is $814.26 billion. In Canada, the national debt is 62.3 percent of the GDP. In South America, Argentina has a national debt of $293.56 billion. The Argentinean national debt is 51 percent of the GDP of Argentina.

The gross domestic product of a country is the market value of all of the products and services that a country produces in one year. This includes spending that is done by the citizens of the country and by the government of that country. It includes the value of items produced within the county and exported elsewhere, but it does not include the value of any imported items. The GDP is the primary way to calculate the size and status of the economy of a country as a whole. It is calculated quarterly as well as yearly.

A comparison:  Fitch downgraded Portugal’s debt aweek or so ago and Monday the 29^th of March they also downgraded the State of Illinois to a- (which is 4 grades above JUNK)  — lets put this in prospective.  Illinois GDP is 633 Billion.  Portugal is 236 billiion and Greece is 343 Billion – Therefore Illinois is bigger; this mountian of Debt is just starting! 

Why you should Buy Gold.

The IMF stated that sales will be conducted in the open market, which is interesting because until now, gold has only been made available to central banks. While the IMF remains open to central banks buying some of the gold, sales will be conducted “in a phased manner over time” to avoid disruptions to the open market.

So, will IMF sales depress the gold price? Well, remember the price rose with the first sale, when it was announced India was buying 200 tonnes of the 212 for sale. But that was an off-take deal, not an open market sale, so the question is legitimate.

One way to look at it is this: global mine production was 80.9 million ounces in 2009, so the IMF’s 6.7 million ounces could be a market-jolting 8.2% addition if dumped all at once. And an 8.2% load would indeed upset a market if we were talking about strawberries or anything else that people buy only for the purpose of consuming.

But most gold isn’t bought for the purpose of using it up. It’s bought for the purpose of holding it. So the relevant comparison for the IMF’s 6.7 million ounces isn’t annual mine production. Instead, we should compare it to the world’s existing stockpile of gold, which is roughly 2 billion ounces. The IMF sale would add just 0.3% to global inventory – hardly a market trasher.

Further, we’ve been down this road before with the IMF. When they sold gold in the 1970s, the price dropped upon the announcement of the sale, but then rose when actual sales took place.

And the dirty joke is this: when the IMF sold gold in the 1970s, it marked a bottom in the price.

The IMF provides some very cushy jobs for the right people, along with a perpetual series of exquisitely catered conferences for the politically connected and politically correct. These people are not exactly known for being the brightest economic decision-makers. However noble their cause, the fact that they’re selling at all in the current environment, given the enormity of the monetary crisis that will only worsen as time goes on, tells me I want to be doing the opposite.

What happens if China buys the IMF’s gold. . .

Debt Watch

The debt-to-GDP ratio for Italy exceeds Greece’s at present, and Japan’s is well above the other countries. Indeed, Japan has the most highly indebted government among OECD countries when measured as a percent of GDP. Note that the U.S. government has a debt-to-GDP ratio that is more or less equivalent to Portugal’s, where yields on government bonds have backed up somewhat this year due to concerns about fiscal sustainability. Is Greece the Tip of the Iceberg?

Uranium

Quite simply the demand for uranium is outstripping the primary supply. In fact, starting from now, uranium supply needs to double just to catch up with current demand. And that’s not even taking into account the expected surge in demand as hundreds of new nuclear reactors come on linein the next ten years.

Even in the United States, which has not built a new nuclear plant in thirty years, US President, Barack Obama announced loan guarantees for two new nuclear plants to be built. But since the mid 1990s the nuclear energy industry has been lucky. In a way, nearly half of the demand for uranium has been met thanks to the end of the Cold War.

How so? You may not believe this but almost half of all uranium used in the world’s nuclear reactors has been sourced from… ex Soviet nuclear warheads! Maybe you have heard of it, it’s been referred to as the “megatons to megawatts” program. And it’s been running since 1993, but it ends in 2013.

Key Fact: There are currently 436 nuclear reactors in operation worldwide.
Right now there are over 50 reactors under construction in 13 countries along with 142 nuclear power reactors planned and an additional 250 which are being proposed. (source: World Nuclear Association)

According to Steve Kidd at the World Nuclear Association, another 142 are in the pipeline, and 53 of these are already under construction. Of the latter, 20 are in China. “We forget that in France in the 1970s they were building five new reactors a year,” he said. “The Chinese are just doing what the French did, but on a Chinese scale.”

The mining boom has been boosted by a surge in the uranium price. “For three decades uranium cost $10 a pound because nuclear power wasn’t seen as very desirable. Now that we have all these concerns about the environment and going low-carbon, it’s different. It hit $137 [a pound] two years ago,” said Joe Kelly, head of nuclear fuel markets at ICAP Energy. Today the spot price for un-enriched uranium is $42 a pound, enough for most projects to go ahead.

Contact us at Banner for selected shares in this sector.

 Stories of Interest:

WASHINGTON (Reuters) – U.S. states face a total shortfall of at least $1 trillion in their funds for employees’ pensions and retirement benefits, and their financial problems are quickly mounting, according to a report released by the Pew Center on the States on Thursday http://www.reuters.com/article/idUSTRE61H13X20100218

http://www.news.com.au/business/secret-summit-of-top-bankers/story-e6frfm1i-1225827289543

http://news.bbc.co.uk/2/hi/business/4684108.stm

http://www.news.com.au/money/property/melbourne-hits-1-billion-property-mark/story-e6frfmd0-1225835436896

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Healthcare news in Japan — the ’new’ developments concerning the National Insurance System/Renewing Visa scenario.

http://search.japantimes.co.jp/cgi-bin/nn20100202a1.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+japantimes+(The+Japan+Times%3A+All+Stories)&utm_content=Google+Reader

DEBT WATCH

In 2009, the book This Time is Different – Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Take a look at the table below outlining federal government receipts (revenues) over the last decade.

If you do the math, you’ll notice that total tax revenues experienced an average annual increase of 0.9% over the past ten years.

Now look at federal government outlays (spending) over the same period.

So, while federal government revenues have grown by an average annual rate of less than one percent over the last decade, spending has nearly doubled during the same period and increased at an average annual rate of 7.9%.

Obama’s new budget calls for a nearly 9% increase in spending over the 2009 level. The only way we won’t have another record deficit in fiscal 2011 will be if tax revenues grow by almost 15%. I highly doubt that, given the state of the economy and unemployment levels. What’s much more likely is for tax revenues to ring in at similar levels to today, which would suggest a 2011 budget deficit of around $1.7 trillion (nearly 75% higher than the CBO’s forecast of $980 billion). Even if tax revenues somehow climbed back to the levels of 2006 – 2008, we’d still be locked into a $1.3 trillion-plus deficit, more than 30% above the CBO’s ridiculous forecast.

GOLD – time to buy more for Fiscal insurance.

1)     The fundamental case for gold is as strong as ever. Production has been falling since 2001. Supply is tight. Overall demand continues rising. Awareness is spreading. Concurrently, money supply is grossly bloated. Debt at all levels has skyrocketed. Dollar printing and bailouts seem endless. And most importantly, the dollar’s woes are far from over. That the abuse of the world’s reserve currency will lead to price inflation is inevitable. The destruction of the dollar’s purchasing power is not a short-term phenomenon and will take years to fully play out. Your best defense is gold.

2)     The gold price will hit another record high in 2010. Gold begins the new year with tremendous momentum behind it: central banks are now net buyers for the first time in 22 years… numerous hedge fund managers are buying physical gold… China will be crowned the world’s #1 gold producer and buyer… new gold ETFs were launched in Singapore and Hong Kong… it’s a long list. And the global arousal of interest in gold will only heighten as concerns about the dollar fester. Further, mainstream media’s usual chilly sentiment toward gold began to thaw late last year (albeit skeptically), and we expect that sea change to strengthen, particularly on gold’s next big leg up.

3)     Seize the day – the Mania is still ahead. Our view remains steadfast that the rush into gold (and silver) is yet to come. That said, we’re not convinced it’s going to happen this year (though it certainly could), but rather that 2010 may be the “platform” year when the stage is set for the big run-up. Translation: any big gold sell-off could be the last chance to get positioned at anywhere near today’s prices.

So, if gold falls into three figures, you’ll find me (and everyone else at Casey Research) queued at our friendly neighborhood precious metals dealers. And a gold price below $1,000 will truly be, in my opinion, a carpe diem moment.

Here are some examples of gains in junior gold/silver exploration stocks between the years 1975 and 1980:

Lion Mines – 1975 price: $0.07 / 1980 price: $380 i.e. an increase of 542,757%

Azure Resources – 1975 price: $.05 / 1980 price: $109 i.e. an increase of 217,900%

Wharf Resources – 1975 price: $.40 / 1980 price: $560 i.e. an increase of 139,000%

Mineral Resources – 1975 price: $.60 / 1980 price: $415 i.e. an increase of 69,067%

Steep Rock – 1975 price: $.93 / 1980 price: $440 i.e. an increase of 47,212%

Bankeno – 1975 price: $1.25 / 1980 price: $430 i.e. an increase of 34,300%

Energy:

The cheap, easy-to-pump oil is fast being used up.  To be sure, there were plenty of oil discoveries in 2009, especially in Brazil and the Gulf of Mexico. A whopping 10 billion barrels of oil was added to reserves, the highest rate since 2000. However, the world is consuming around 83 million barrels a day, which equates to 31 billion barrels a year. So, even in a good year, we barely replaced one third of the oil we consumed

The world is producing up to 93 million barrels per day, but production at existing wells is declining at up to 8% a year. That means we have to add more than 6 million barrels per day every year to keep production flat. Five years down the road, we’ll likely have to replace 30 million barrels of production. That’s more than three times the amount of oil (8.1 million barrels per day) that Saudi Arabia produced in 2009.

That means we have to drill a lot more wells. And the oil we find is very deep and therefore very expensive. Oil companies are now putting drills down 4,000 feet in the Gulf of Mexico to then drill through 35,000 feet of rock. These wells are deeper than Mount Everest is tall! Assuming that significant finds are made, it will still be 7 to 10 years before the wells go into production.

Oil prices longer term are going up, until there is an alternative . . . on final thought on Energy prices – do world’s governments actually want higher energy prices?  The simple reason is the TAX generated on these is greatly needed – as tax revenue in all other areas is falling. Things that make you go Humm?

Comment on BONDS from INSTITUTIONAL ADVISORS

Zero percent interest rates create different economic environment, just like Zero degrees Kelvin (a.k.a. absolute zero) creates a different physical environment. Once we hit 0% it is very difficult to turn back, mainly because we can’t go much lower and therefore we don’t get any more relief from a further decline in rates. While the great majority of experts are talking about exit strategies and are attempting to time when the Fed and BOC will start raising rates, I would like to point out that the Bank of Japan has stuck with a 0% interest rate policy for close to 2 decades. At this point, that appears to be the path of least resistance in my opinion.

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Money isn’t everything, according to a group of affluent Americans surveyed by Merrill Lynch Wealth Management. Focusing on family and friends, it turns out, gained in importance through the recession.

Just over half of retired respondents with at least $250,000 to invest said they wished they had focused more on their “life goals” than on “the numbers,” according to the firm’s Affluent Insights Quarterly, released Jan 18th. In fact the leading response was wishing they had given more thought to how they wanted to live in retirement (38 percent) followed by wishing they had worked with a financial adviser earlier (23 percent) and given up more luxuries to reach their retirement goals (18 percent).

Getting advice on your Finances and insurance

Why do I need financial advice on life insurance?

Life insurance is a very personal product. There’s only one of you. And your cover needs to be tailored to your circumstances, and your budget.

The amount of cover you need, and the types of cover you need, can vary greatly depending on your individual circumstances.

Besides, not all insurance policies are created equal – some have additional, and included, benefits and features.

An adviser can also help you make your insurance more affordable by recommending strategies including:

• taking advantage of the tax-effectiveness of insurance
• combining your cover with a family member to reduce your premiums
• choosing the right combination of benefits and extra options.

By looking at your income, your debts, and your family’s circumstances, a Banner adviser can help you get the right cover – and the right structure – to meet your needs and your budget.

Arranging life assurance cover is the best way to ensure your family is taken care of in the event of your death, giving both you and them peace of mind.

Just a reminder

All USA federal debt, including unfunded liabilities, isn’t 100% of GDP, but 500%+. In most industrialized countries, federal-government debt is between 350% and 360% of GDP. Eventually the U.S. will arrive at a point where interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30% you are done. You go into default or your currency breaks down and your system collapses. The problem you will run into first is a dramatic increase in individual tax rates. You’ll see bigger wealth redistribution programs than you can believe.

The end game for Japan?

Thoughts from The Absolute Return Letter – February 2010

The first country to really feel the pinch could very well be Japan; in the bigger context, Greece is just the appetizer. Japan’s debt-to-GDP ratio has grown from 65% in the early 1990s when their crisis began in earnest to over 200% now. Fortunately for Japan, the high savings rate has allowed shifting governments to finance the deficit internally with about 93% of all JGBs held domestically[3]. This is the key reason why Japan gets away with paying only 1.3% on their 10-year bonds when other large OECD countries must pay 3-4% to attract investors.

Now, predicting the demise of Japan has cost many a career over the years. Despite the ever rising debt, and contrary to many expert opinions, the yen has been rock solid and bond yields have remained comparatively low. I often hear the argument from the bulls that the Japanese situation is sustainable because they, unlike us, are a nation of savers. Wrong. They were a nation of savers.

Looking at chart 5, it is evident that the demographic tsunami has finally hit Japan. The savings rate is in a structural decline and the Ministry of Finance in Tokyo may soon be forced to go to international capital markets to fund their deficits. I very much doubt that non-Japanese investors will be as forgiving as the Japanese, and that could force bond yields in Japan in line with US and German yields. Herein lies the challenge. Japan already spends 35% of its pre-bond issuance revenues on servicing its debt. If the Japanese were forced to fund themselves at 3.5% instead of 1.3%, the game would soon be up.

So if you have Yen sitting in the bank time to move and take advantage of the current exchange rate  . .