• 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.

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.

provided by

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  . .