Monday, October 31, 2011
Occupy your Money, Buy physical silver Bullion. In this vid, Patrick MontesDeOca chats with Eric Sprott in this exclusive interview that took place at the Silver Summit in Spokane, Washington the week of October 17, 2011. Mr. Sprott speaks in riveting detail about the Silver Market and it’s outlook through this year and next, in this not-to-be-missed interview.
This price volatility is taking its toll on investors. Some have abandoned stocks altogether in favor of safer assets such as Treasuries. While greater safety sounds appealing, the trade-off is subpar returns. At present, 10-year Treasuries yield just 2.2%.
Fortunately, there is another strategy investors can use to minimize price swings in their portfolios and earn better returns than Treasuries. Both these goals can be achieved by owning low volatility stocks. Even better, these stocks tend to outperform the market over the long-haul.
[StreetAuthority co-founder Paul Tracy calls these "forever stocks." Simply put, they're safe, dependable stocks you can buy, hold practically forever, and sleep well at night doing it. [If you haven't seen his special presentation on "forever stocks," go here to learn more.]
Data show that low-volatility stocks outperform the market in the long run, without the big price fluctuations. For example, the Standard & Poor's Low Volatility Index, which consists of the 100 least volatile stocks in the S&P 500, gained 80% in the past decade compared with a return of 42.9% for the S&P 500, including reinvested dividends. Also, between 1968 and 2010, the least volatile large-cap U.S. stocks gained 10.2% a year and outperformed the most volatile large-cap stocks, which returned just 6.6% a year, according to Financial Analysts Journal.
The best way to find these low-volatility stocks is by using a simple tool called "beta," which measures the volatility of a given stock relative to the overall market. The overall market carries a beta value of 1, so a stock beta of 0.5 means the stock is half as volatile as the market. No need to calculate beta yourself; Yahoo Finance, Reuters and many other financial websites and databases calculate individual stock betas for you.
I've found three great low beta stocks that are worth a further look. Adding these steady eddies to your portfolio should dampen price swings and help you sleep better at night.
1. General Mills (NYSE: GIS)
This global foods giant produces cereals, baked goods and other foods under the Cheerios, Wheaties and Pillsbury brands. In the past five years, the company's sales grew 5% a year to $14.9 billion, and earnings per share (EPS) improved 13% yearly to $2.48. A beta of 0.22 indicates that General Mills shares have less than a quarter of the market's volatility.
General Mills has a 113-year dividend history and has raised dividends an average of 11% in each of the past five years. The current $1.22 annual rate, gives shares a 3% yield. The company is very profitable, with 17% operating margins, twice the 8% food processing industry average, and 25% return on equity (ROE). Analysts predict General Mills' international expansion and new products will drive 8% annual earnings growth in the next five years. This stock won't deliver you fast-and-furious gains, but you can expect reasonable returns and steadily growing dividends with this stock in the long-term.
2. The Southern Company (NYSE: SO)
Because of highly predictable cash flow and earnings, utility stocks often have low betas. Southern is one of the least volatile utilities, with a beta of just 0.28.
Southern provides electricity to 4.4 million customers in Georgia, Alabama, Florida and Mississippi. Although Southern's sales grew 5% a year in the past five years to $17.5 billion, earnings per share grew much slower, just 2% year to $2.37, because of ongoing investments in new generating capacity. Future earnings, however, should rise as these new power plants come on-line. Analysts look for earnings growth to accelerate to 6% a year during the next five years.
Southern has paid dividends for 63 years and increased payments for 10 years in a row. In the past five years, dividends have grown 4% a year to a $1.89 annual rate. Southern shares yield 4.3% and have returned 11.8% a year to investors in the past decade.
3. Kimberly Clark (NYSE: KMB)
Kimberly-Clark sells diapers, tissue and other paper items under the well-known Kleenex, Scott and Huggies brands. The company holds the No. 1 or No. 2 market share in more than 80 countries. During the past five years, Kimberly-Clark's sales grew 5% a year to a current $19.7 billion, while earnings per share also grew 5% a year, to a recent $4.68. Dividends have grown 10% a year during this time frame, to a current annual rate of $2.80.
In the next five years, Kimberly Clark plans to accelerate annual earnings growth to a 7-8% rate by cutting $500 million in costs, expanding in Asia and Latin America and boosting sales of higher-margin hygiene and health care products.
Kimberly Clark has hiked dividends for 39 years straight. Shares currently yield 3.8%
Risks to consider: Low-volatility stocks do well during bear markets, but can underperform badly during market rallies. For example, in 2009, low volatility stocks gained 19.2%, but underperformed compared to the S&P's 26.5% climb. To be successful with a low volatility strategy, you must commit for the long-term.
Action to take--> Any of these three stocks are low-risk holdings and are suitable for conservative portfolios. My top pick is General Mills, which has the lowest beta and the highest historic earnings and dividend growth of the three. I also like Kimberly Clark because of its steady dividend growth and expansion into high-growth emerging markets. Southern Company is a safe play on electricity demand as the U.S. economy recovers.
Trends are what allow traders and investors to capture profits. Whether on a short- or long-term time frame, in an overall trending market or a ranging environment, the flow from one price to another is what creates profits and losses. There are four major factors that cause both long-term trends and short-term fluctuations. These factors are governments, international transactions, speculation and expectation, and supply and demand.
Major Market Forces
Learning how these major factors shape trends over the long term can provide insight into why certain trends are developing, why a trend is in place and how future trends may occur. Here are the four major factors:
Governments hold much sway over the free markets. Fiscal and monetary policy have a profound effect on the financial marketplace. By increasing and decreasing interest rates the government and Federal Reserve can effectively slow or attempt to speed up growth within the country. This is called monetary policy.
- International Transactions
The flow of funds between countries impacts the strength of a country's economy and its currency. The more money that is leaving a country, the weaker the country's economy and currency. Countries that predominantly export, whether physical goods or services, are continually bringing money into their countries. This money can then be reinvested and can stimulate the financial markets within those countries.
- Speculation and Expectation
Speculation and expectation are integral parts of the financial system. Where consumers, investors and politicians believe the economy will go in the future impacts how we act today. Expectation of future action is dependent on current acts and shapes both current and future trends. Sentiment indicators are commonly used to gauge how certain groups are feeling about the current economy. Analysis of these indicators as well as other forms of fundamental and technical analysis can create a bias or expectation of future price rates and trend direction.
- Supply and Demand
Supply and demand for products, currencies and other investments creates a push-pull dynamic in prices. Prices and rates change as supply or demand changes. If something is in demand and supply begins to shrink, prices will rise. If supply increases beyond current demand, prices will fall. If supply is relatively stable, prices can fluctuate higher and lower as demand increases or decreases. Effect on Short- and Long-Term Trends
If government spending increases or contracts, this is known as fiscal policy, and can be used to help ease unemployment and/or stabilize prices. By altering interest rates and the amount of dollars available on the open market, governments can change how much investment flows into and out of the country.
With these factors causing both short- and long-term fluctuations in the market, it is important to understand how all these elements come together to create trends. While these major factors are categorically different, they are closely linked to one another. Government mandates impact international transactions, which play a role in speculation, and supply and demand plays a role in each of these other factors.
Government news releases, such as proposed changes in spending or tax policy, as well as Federal Reserve decisions to change or maintain interest rates can have a dramatic effect on long term trends. Lower interest rates and taxes encourage spending and economic growth. This has a tendency to push market prices higher, but the market does not always respond in this way because other factors are also at play. Higher interest rates and taxes, for example, deter spending and result in contraction or a long-term fall in market prices.
In the short term, these news releases can cause large price swings as traders and investors buy and sell in response to the information. Increased action around these announcements can create short-term trends, while longer term trends develop as investors fully grasp and absorb what the impact of the information means for the markets.
The International Effect
International transactions, balance of payments between countries and economic strength are harder to gauge on a daily basis, but they play a major role in longer-term trends in many markets. The currency markets are a gauge of how well one country's currency and economy is doing relative to others. A high demand for a currency means that currency will rise relative to other currencies.
The value of a country's currency also plays a role in how other markets will do within that country. If a country's currency is weak, this will deter investment into that country, as potential profits will be eroded by the weak currency.
The Participant Effect
The analysis and resultant positions taken by traders and investors based on the information they receive about government policy and international transactions create speculation as to where prices will move. When enough people agree on direction, the market enters into a trend that could sustain itself for many years.
Trends are also perpetuated by market participants who were wrong in their analysis; being forced to exit their losing trades pushes prices further in the current direction. As more investors climb aboard to profit from a trend, the market becomes saturated and the trend reverses, at least temporarily.
The S & D Effect
This is where supply and demand enters the picture. Supply and demand affects individuals, companies and the financial markets as a whole. In some markets, such as the commodity markets, supply is determined by a physical product. Supply and demand for oil is constantly changing, adjusting the price a market participant is willing to pay for oil today and in the future.
As supply dwindles or demand increases, a long-term rise in oil prices can occur as market participants outbid one another to attain a seemingly finite supply of the commodity. Suppliers want a higher price for what they have, and a higher demand pushes the price that buyers are willing to pay higher.All markets have a similar dynamic. Stocks fluctuate on a short and long-term scale, creating trends. The threat of supply drying up at current prices forces buyers to buy at higher and higher prices, creating large price increases. If a large group of sellers were to enter the market, this would increase the supply of stock available and would likely push prices lower. This occurs on all time frames.
The Bottom Line
Trends are generally created by four major factors: governments, international transactions, speculation/expectation, and supply and demand. These areas are all linked as expected future conditions shape current decisions and those current decisions shape current trends. Government affects trends mainly through monetary and fiscal policy. These policies affect international transactions which in turn affect economic strength. Speculation and expectation drive prices based on what future prices might be. Finally, changes in supply and demand create trends as market participants fight for the best price.
Oil has been markedly absent in the financial headlines lately. While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today, providing over 1/3 of our energy supply. Although it is well understood that the oil price is critical to the global economy, we sometimes neglect to appreciate how tightly oil supply is correlated to global growth. By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.
Production – Where’s the Growth?
We begin with a review of global oil production. We first wrote about Peak Oil back in 2005; and speculated that we were approaching the pinnacle of global crude oil production.1 As Figure 1 below illustrates, since that time, global oil production has grown very little, appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.2
Despite this extremely large and sustained increase in price, oil production has failed to grow meaningfully. Over the past ten years, most experts have consistently overestimated future production growth and have continually revised their forecasts lower as a result. Figure 2 from the U.S. Energy Information Administration (“EIA”) below charts production forecasts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil production estimates lower for 2015 and 2020 by 14% and 18%, respectively. In light of these downward revisions, it still seems extremely optimistic that supply will increase significantly in the coming years.
Figure 3 above illustrates that the International Energy Agency (“IEA”) estimates have been just as inaccurate, forcing it to reduce its global oil production estimates year after year. It is also important to reflect on the pricing environments that were predicted years ago when these optimistic forecasts were made.
Above are charts of the EIA’s 2002 and 2010 oil price predictions. Over the last eight years its high case future price prediction has increased by over 600% from the low $30s to north of $200, while the median reference price has gone from below $30 to almost $150 by 2035. Reflecting on these historical price forecasts really puts into perspective the amount that production growth has disappointed. Had the oil price stayed in the EIA’s 2002 predicted price range, global production would have significantly declined. In fact, all of the production growth we have experienced since then can essentially be attributed to high cost oil operations which are economically dependent on very high oil prices.
We highlight the magnitude of these forecast errors not to criticize their sources but to emphasize how terribly unprepared we are to deal with an oil production-constrained world. Economic growth is well correlated with oil consumption as increasing global GDP requires increased energy use that is heavily oil dependent. Conversely, if oil supply is limited or declines, real economic growth tends to stagnate, if not decline, in lockstep. If a country begins to lose its access to affordable energy its economy will likely shrink.
Why are Prices High? – No More Giants
There are a number of reasons why there has been so little growth in supply. First, and most importantly, global supply is struggling to grow because we are not finding and bringing into production any new “super giant” oilfields. This reality was well documented by the EIA in a study it published in 2008.3
The EIA study revealed that the largest 1% of oilfields (798 total fields) in the world account for over 50% of global production. Remarkably, in this group, there are 20 super giant fields which account for roughly 25% of global production. All of these super giant fields were discovered decades ago.
What has been discovered and brought into production in the past few decades are smaller fields, which normally have higher decline rates. As these new smaller fields replace production from larger fields, and older larger fields age, we can expect the global observed decline rate to increase from the current estimated rate of 6.7% (or 4.7 million barrels per day annually).
Rising Production Costs Necessitate High Prices
Oil prices are also high due to rising production costs, and it’s worth noting that new production sources, such as offshore, tar sands and other unconventional sources are amongst the highest cost producers today. These oil sources now make up a significant and growing percentage of global production. As a result, it is becoming clear to many industry analysts that current oil production cannot be sustained under $75 a barrel and the price required to sustain production seems destined to continually rise.
Middle East Exports are Increasing in Cost and Risk
There have also been significant political developments of late which have permanently altered the dynamics of the oil markets. The so-called “Arab Spring” uprisings in countries such as Egypt and Libya are forcing these and other major oil producing nations to spend more of their oil revenue on social assistance programs. For example, as a result of newly announced social spending in Saudi Arabia, it is forecasted by The Institute of International Finance, Inc. that the budget balancing price of Saudi oil will jump from $68 per barrel in 2010 to $85 per barrel in 2011 and then continue to rise, but at a slower pace, to $110 per barrel by 2015.4
In general, it can also be said that political instability and social unrest are very detrimental for oil investment and production. Recently, as Libya collapsed into civil war, production went to near zero causing extreme volatility in the Brent Crude price. As the Middle East region continues to experience riots and protests, we can only assume that there will continue to be heightened risk of disorderly political change which could dramatically increase prices in the future.
Regardless, it now appears that even if, politically speaking, the status quo is maintained, the majority of the Middle East exporting nations are now producing at or near capacity while domestic consumption is increasing. Their economies and populations are continuing to grow and mature and, as a result, their exporting capacity will in turn be limited and possibly begin to terminally decline.
Major Oil Companies’ Production in Decline
The struggle to grow oil production, especially non-OPEC production, was highlighted in a recent report by Deutsche Bank’s Paul Sankey that measured the dramatic oil declines for major oil companies in Q2 2011.5 Despite $120 per barrel Brent pricing during Q2 2011, the results of more than 20 major oil companies showed a 1 million barrels per day year-over-year decline. The sample group in the report accounted for over 1/3 of global production, so it would be difficult to expect smaller companies to make up their shortfall.
Supply Constrained and Prices to Remain High
In summary, even though the oil price has been averaging 4-5 times higher than the most knowledgeable industry watchers would have expected just eight years ago, global production has remained relatively stagnant. Government agency production estimates have been overly optimistic and a review of the oil market environment suggests production will continue to disappoint. High prices are now required just to maintain current global production. Even with robust pricing, it is beginning to appear that a tremendous amount of our existing production is at risk due to rising rates of decline and political instability. These factors may soon push global production into an irreversible decline. (more)
It has been just over 48 hours since our call that PIIGS the world over will scramble to demand the same concessions that were just granted to Greece courtesy of its economy being in the toilet and getting worse (thanks to lies to misrepresent the Greek economy as being worse than it really was). We already got Ireland yesterday. Now it is Portugal's turn. Reuters reports that "Portugal asked Mexico on Saturday to tell fellow G20 members next week that the United States should offer "financial help" to resolve the euro zone sovereign debt crisis, describing it as a "systemic and global" problem, a Portuguese government source said." Of course, the "US" is a clear proxy for "everyone else" - that the US, whose politicians can't agree on a fiscal stimulus for the US, let alone for some country by the straits of Gibraltar they have never heard of, will not move an inch to save Portugal is a given. Which means that once Portugal is, as it anticipates perfectly well, shut down by the US it will commence demanding for help from those who at least can grant it - the EMU and the Eurozone. And when those refuse, Portugal will do the glaringly obvious: take a page right out of the Greek textbook and proceed to suicide its own economy. And why not - it worked miracles for Greece. Now: two down and two to go. The only question is when does Italy do precisely the same logical next step, and tell the world that its $2+ trillion in debt, the second most in the Eurozone after only Germany, is unsustainable, and will need a modest haircut. 20% should do it. We wonder, what will that do to French banks (and their "perfectly hedged" US proxies - such as MF Global and others)?
The story from Reuters:
"The crisis isn't in the euro zone. It is a systemic and global crisis and we hope that other big G20 countries intervene," the source told reporters in the capital Asuncion, speaking on condition of anonymity.
The source added that Washington should help resolve the crisis "by boosting trade and also with financial help."
No one from Calderon's delegation in Asuncion could immediately be reached for comment.
Financial markets rallied strongly this week after European leaders hammered out a deal to recapitalize their banks, boost the firepower of a euro zone rescue fund, and impose hefty losses on holders of Greek debt.
Portugal's deepending financial plight was described in great detail late last week by Ambrose Evans-Pritchard of the Telegraph:
Monetary contraction in Portugal has intensified at an alarming pace and is mimicking the pattern seen in Greece before its economy spiralled out of control, raising concerns that the EU summit deal may soon washed over by fast-moving events.
Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the past six months, buckling violently in September.
"Portugal appears to have entered a Grecian vortex and monetary trends have deteriorated sharply in Spain, with a decline of 8.4pc," said Simon Ward, from Henderson Global Investors. Mr Ward said the ECB must cut interest rates "immediately" and launch a full-scale blitz of quantitative easing of up to 10pc of eurozone GDP.
The M1 data - cash and current accounts - is watched by experts as a leading indicator for the economy six months to a year ahead. It has been an accurate warning signal for each stage of the crisis since 2007.
A mix of fiscal austerity and monetary tightening by the ECB earlier this year appear to have tipped the Iberian region into a downward slide. "The trends are less awful in Ireland and Italy, suggesting that both are rescuable if the ECB acts aggressively," said Mr Ward.
A shrinking money supply is dangerous for countries with a high debt stock. Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.
And where monetary shrinkage arrives, economic deterioration is always next. But just to make sure of that, Portugal has just set the first of many dates for a General Strike. Mark November 24th on your calendars. This is when Greece officially becomes Portugal.
The good news is, a recent pick-up in consumer spending is fending off fears of another U.S. recession.
The bad news is, it's coming at the expense of Americans' savings.
On average, consumers put 3.6% of their hard-earned dough into savings in September, the government reported Friday. It marks the lowest level of saving since December 2007, when consumers stashed away only 2.6% of their income.
But deciphering the meaning of the savings rate is a tricky business.
On one hand, many economists had hoped the Great Recession would spark a newfound period of thrift and frugality, lessening consumers' vulnerability to financial shocks in the future. (The recession did have this effect for a while, sending the savings rate as high as 7.1% in mid 2009.)
On the other hand, American businesses have argued that without an increase in demand for their products, there's no incentive for them to create more jobs. If consumers continue to save rather than spend their money, why should the restaurant down the street, the local big-box retailer or even large American manufacturers ramp up their hiring?
On Thursday, the government's latest report on U.S. economic growth showed that since July, consumers have started to slow down the amount they add to their savings, to ramp up their spending more instead.
Adjusted for inflation, consumer spending rose 2.4% in the third quarter.
That was not only strong enough to boost overall economic growth in the recent quarter, it also led some economists to boost their forecasts for fourth quarter growth.
But at the same time, others are reluctant to carry their optimism into their 2012 forecasts.
Mark Vitner, a senior economist at Wells Fargo, points out that the increase in spending has come even as consumers saw their disposable income fall 1.7% in the third quarter (adjusted for inflation and taxes).
"The sluggish income growth cast doubts on how sustainable the pickup in economic growth is," he said. "Without an increase in income, consumers can't afford to keep increasing their spending at the the pace that they have."
Considering all the attention investment pros (and financial magazines) lavish on picking the right stocks and funds, I can understand why you might think superior investing ranks above all else when it comes to a secure future and a comfortable retirement.
Savvy investing is certainly important — you don't want to blow your savings on lousy funds or ineffectual strategies. And you'll end up richer if you happen upon a winning investment. If you'd owned the Sequoia Fund for the past decade, for example, a $10,000 balance would have grown to more than $16,000 now, vs. $12,800 if you'd simply earned the market return.
But as a practical matter you can't know in advance which fund or stock will beat the market — in fact, over the past 15 years, only 55% of U.S. equity funds did so, according to Morningstar. Rather than pinning your hopes on higher returns, I'd say boosting your savings rate is a surer way to improve your retirement prospects.
To see what I mean, check out this example. Let's say you're 35 years old, earn $60,000 a year, and sock away 10% of your salary (including your company match) into a 401(k) that's already worth $75,000. And assume you're stashing your retirement moolah in a diversified portfolio of 60% stocks and 40% bonds.
You're doing a reasonable, though not spectacular, job of preparing for retirement. Your savings rate is decent, though it could be better. As for investing, you're hardly a slouch, but ideally you should be devoting more of your 401(k) to stocks.
The key is starting with an overall plan — that is, deciding on the appropriate asset allocation, or blend of stock and bond funds that makes sense given your age and stomach for risk.
Indeed, when the folks at T. Rowe Price ran the numbers on this saving and investing regimen, they projected that you'd have a 68% chance of accumulating enough money to retire in 30 years on 70% of your pre-retirement income and not deplete your funds until age 92.
Not bad. But if you could do just one thing to improve your outlook, what would it be? Save more or earn more?
You can't, of course, say you'd prefer an 8% annual return instead of 6% and turn a dial higher to get it. The investing world doesn't work that way. So to try to earn more you have to invest more aggressively.
In this example, both increasing your savings rate from 10% to 12% and shifting to a more growth-oriented portfolio that's 80% stocks and 20% bonds — an appropriate mix for a 35-year-old — will boost your chances of retirement success. But saving more has a larger effect than earning a higher return would.
In the real world you're not limited to one move. You can bump up the amount you save and improve a sub par investing strategy. Do both those things — which, ideally, you would — and you can feel even more confident about achieving a secure retirement.
In theory, later in your career, when you're more likely to have a large balance in your retirement accounts, a relatively modest increase in your rate of return could boost the size of your nest egg more than upping your savings rate would.
On a $500,000 portfolio, for example, an additional half percentage point of return would translate to an extra $2,500 a year, more than someone earning $100,000 would get by moving from a 10% to a 12% savings rate.
Trouble is, the more risk you take in pursuit of loftier gains, the more your returns will jump up and down from year to year, and the harder your portfolio will get hammered during market setbacks. Take a 55-year-old a decade from retirement — for that person, a pedal-to-the-metal approach is no help. Because you have less time to recover from a setback, it slightly cuts your chances of reaching your goals.
That said, you still have one way to effectively earn more on your portfolio — without ratcheting up risk: Pare investment fees.
Annual expenses for stock funds average 1.5%, while the yearly tab for bond funds comes in at roughly 1%. By opting for low-cost options like index funds and exchange-traded funds, which often charge less than 0.5% annually, you may be able to reduce your costs by anywhere from a half to a full percentage point a year. Over the course of a career, that can boost the eventual size of your nest egg a good 10% to 20%.
Finally, there's one more compelling reason not to rely on astute investing. Given the sluggish growth and onerous levels of government debt here and abroad, even the most savvy investors may have to settle for relatively modest returns. That could be a major problem if your retirement security hinges on racking up big gains. Boosting your savings rate is a surer way to increase the ultimate size of your portfolio.
So by all means, make sure you're investing as well as you can. If you really want to improve your prospects, though, save more.
[Ed. Note: Chris Powell (GATA) had some remarks on this piece.]
by Philip Barton, GoldStandardInstitute.net:
The current estimate for the amount of gold stock in the world is in the region of 170,000 tonnes. As the very first step, it needs to be acknowledged that an estimate is all that is available. Running a worldwide survey on how much gold people own is rather pointless. Even in good times, people are noticeably reluctant to discuss their true wealth. In troubled times, such as now, that becomes an unwillingness to even be interviewed. Nevertheless, it also needs to be emphatically stated that 170,000 tonnes is far too low an estimate and that it is time for a revision. Every single media outlet repeats this same figure, or similar, as though it is gospel.
Included in this 170,000 tonnes is the 10,000 tonnes estimated as being the total amount of gold mined in the history of the world prior to the Californian gold rush of 1848. This was simply a guess.
|Date||Time (ET)||Statistic||For||Actual||Briefing Forecast||Market Expects||Prior||Revised From|
|Oct 31||9:45 AM||Chicago PMI||Oct||-||60.0||58.9||60.4||-|
|Nov 1||10:00 AM||ISM Index||Oct||-||53.0||52.1||51.6||-|
|Nov 1||10:00 AM||Construction Spending||Sep||-||0.8%||0.3%||1.4%||-|
|Nov 1||3:00 PM||Auto Sales||Nov||-||NA||NA||4.07M||-|
|Nov 1||3:00 PM||Truck Sales||Nov||-||NA||NA||5.97M||-|
|Nov 2||7:00 AM||MBA Mortgage Index||10/29||-||NA||NA||4.9%||-|
|Nov 2||7:30 AM||Challenger Job Cuts||Oct||-||NA||NA||-211.5%||-|
|Nov 2||8:15 AM||ADP Employment Change||Oct||-||130K||100K||91K||-|
|Nov 2||10:30 AM||Crude Inventories||10/29||-||NA||NA||4.735M||-|
|Nov 2||12:30 PM||FOMC Rate Decision||Nov||-||0.25%||0.25%||0.25%||-|
|Nov 3||8:30 AM||Initial Claims||10/29||-||400K||402K||402K||-|
|Nov 3||8:30 AM||Continuing Claims||10/22||-||3700K||3675K||3645K||-|
|Nov 3||8:30 AM||Productivity-Prel||Q3||-||2.8%||2.8%||-0.7%||-|
|Nov 3||8:30 AM||Unit Labor Costs -Prel||Q3||-||-1.0%||-1.1%||3.3%||-|
|Nov 3||10:00 AM||Factory Orders||Sep||-||-0.5%||-0.2%||-0.2%||-|
|Nov 3||10:00 AM||ISM Services||Oct||-||53.0||53.7||53.0||-|
|Nov 4||8:30 AM||Nonfarm Payrolls||Oct||-||100K||88K||103K||-|
|Nov 4||8:30 AM||Nonfarm Private Payrolls||Oct||-||130K||114K||137K||-|
|Nov 4||8:30 AM||Unemployment Rate||Oct||-||9.2%||9.1%||9.1%||-|
|Nov 4||8:30 AM||Hourly Earnings||Oct||-||0.2%||0.2%||0.2%||-|
|Nov 4||8:30 AM||Average Workweek||Oct||-||34.3||34.3||34.3||-|
Saturday, October 29, 2011
Next, what's the company's dividend track record? Does it raise its dividend like clockwork every year or does it boost the payout one year and leave it alone for two or three years?
Those are just two questions income investors need to ask. Another is ''Am I better off looking overseas for dividend stocks?'' In many instances, the answer is a resounding ''Yes.''
Investors that examine American Depositary Receipts (ADRs), which represent shares of foreign companies and trade on major U.S. exchanges, across any number of sectors are in for a pleasant surprise. There's an excellent chance of finding at least one foreign stock that offers a better payout in dollar terms and perhaps a higher yield than a U.S. company in the same industry.
A primary component of dividend investing is safety. And with the right international dividend payers, U.S. investors are not sacrificing dependability and safety at all. Let's take a look at four safe global dividend stocks...
1. Royal Dutch Shell (NYSE: RDS-A, RDS-B)
Royal Dutch Shell is Europe's largest oil company.
Here are the vitals on Shell: The ADRs currently yield 4.8%, and the annual payout in dollar terms is $3.36 a share. Shell's current yield is double that of Exxon Mobil's (NYSE: XOM), and far superior to Chevron's (NYSE: CVX) 3% yield. Shell's payout bests the U.S. oil giants on a dollar basis as well.
Shell has the cash on hand ($6.24 a share) to at least maintain its current dividend level, and the dividend has doubled twice since 1988. One quibble: Shell hasn't raised its dividend since 2009.
2. Nestle (NSRGY.PK)
Don't be alarmed by the fact that Nestle, the world's largest food company, trades on the Pink Sheets. It's not unusual for foreign companies, even large ones, to do this in order to avoid the costs associated with listing on a major U.S. exchange.
With that housekeeping item out of the way, compare Nestle to the most logical U.S.-based equivalent, which would be Dow component Kraft (NYSE: KFT). Nestle's current payout ratio is just north of 55% while Kraft's is 67%. The Swiss company has also dramatically slashed its debt to about $16.6 billion at the end of June from almost $34 billion a year earlier. Kraft has $23.4 billion in long-term debt.
In the past five years, while Kraft shares are basically flat, Nestle is up almost 70%. Given that both stocks yield roughly the same at just under 3.5%, Nestle could be the better investment, if history is any guide.
3. France Telecom (NYSE: FTE)
Telecom stocks are prized for both good dividends and being defensive plays. U.S. telecom behemoths AT&T (NYSE: T) and Verizon (NYSE: VZ) have an average yield of 5.65%. That's pretty good. It's also 2% less than what France Telecom offers. That's part of the good news, but there are some issues to consider before jumping straight into France's largest telecom company.
First, the French government owns almost 27% of France Telecom. Second, the company pays its dividend semi-annually, exposing it to fluctuations in the euro. On the other hand, France Telecom has an emerging markets story that isn't recognized all that much by Wall Street. The company has a foothold in emerging European markets such as Poland and other Eastern European countries. The company also has a presence in 13 African nations, according to the Financial Times. And with a dividend payout ratio in the mid-40s, the company is generating ample cash flow to cover its dividend obligations.
4. BHP Billiton (NYSE: BHP)
BHP Billiton is the world's largest mining company, becoming so by acquiring companies in the industry left and right. Many U.S. investors have probably heard of the Anglo-Australian mining giant, however, they might not think of this as a good dividend stock because many U.S.-based materials and mining stocks don't offer great payout.
While BHP's yield of 2.9% isn't jaw-dropping, the stock meets important dividend qualifications. In terms of growth, BHP's twice-yearly dividend was $0.31 a share in 2002. This year it was $2.02. The company had $16.6 billion in cash and short-term investments as of July 2011, and a payout ratio of 21% shows there's room for dividend growth without hampering BHP's cash hoard.
Risks to Consider: All dividend investors looking at foreign stocks must remember currency fluctuations can impact the dividends paid, either positively or negatively. Plus, a weaker U.S. dollar means stronger currencies in the homes of foreign companies, and that hurts export dependent businesses. In the case of Shell and BHP Billiton, these stocks reside in high-beta sectors that are dependent on a thriving global economy to drive returns.
Action to Take--> This quartet is a diverse portfolio in its own right, but conservative investors should definitely lean in favor of Nestle, then France Telecom. The most adventurous souls can cozy up to BHP, while those with some tolerance for risk will find Shell is somewhere in the middle in terms of risk profile for this group of stocks.
from King World News:
With gold, silver and stocks all having big up-moves this week, today King World News interviewed Peter Schiff, CEO of Europacific Capital. Schiff made some great calls recently including the move higher in the euro. When asked about the huge move in gold and silver, Schiff stated, “I think there’s more to come. Look at the technical action in everything, in stocks around the world, in commodities. Look at the price of crude oil and look at the dollar, the dollar is breaking down. I mean we had a huge decline against the Australian dollar, but look at that surge back into the 1.40s on the euro.”
Peter Schiff continues: Read More @ KingWorldNews.com
A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.The local media reports said an unspecified number of people were injured.
Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district.
The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high.
22% Drop Overnight
The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming.
Housing Math in China
- 18,000 Yuan per square meter is about $2,835 per square meter
- One square meter = 10.7639104 square feet
- Cost per square foot = $2,835 ÷ 10.7639104 = $263.38 per square foot
In downtown Shanghai, the price is 48,000 yuan per square meter or roughly $696.77 per square foot.
I am told these are for roughly finished units (no carpeting, appliances, etc), just stark bare units.
For more on absurd Downtown Shanghai property prices, please see Property Developers Hurting in China; New Homes Sales Down 50% in Shanghai; Preposterous Prices Won't Last; Commodities to be Hit in Building Slump
Protests Hit China as Property Prices Fall
Yahoo! Finance has additional protest details in Protests hit China as property prices fall
Hundreds of angry home buyers launched a series of protests in China's commercial hub of Shanghai this week, as owners decried falling prices for their properties, state media said Thursday.
In the latest incident, some 200 home owners on Wednesday besieged the sales office for a project of leading developer Greenland Group, demanding refunds.
"We require a refund because the loss we are suffering now is too great for us to afford," the Shanghai Daily quoted a protestor as saying.
He paid 17,000 yuan ($2,678) per square metre last year and claimed the developer had cut the price by around 30 percent to boost sales.
In a another incident, 30 home owners stormed the sales office of a project of Hong Kong-listed China Overseas Land & Investment Ltd. on Wednesday, the Global Times said, repeating a similar protest from over the weekend.
Demand for apartments has been falling after authorities, fearing a property bubble, banned the purchase of second homes, increased minimum downpayments and trialled property taxes in some cities -- including Shanghai.
At the same time, property developers have been hit by a lack of funds, as the government hiked interest rates and restricted bank lending to rein in surging inflation and bring real estate prices into line.
Ratings agency Standard & Poor's expects China's property prices to fall by 10 percent nationwide over the next year as the measures take effect.
S&P 10% Decline Prediction is Hugely Understated
Prices in many places are already down 20 to 30 percent and things will get to the 50 t0 70 percent decline mark before this is over.
"Twilight Zone" of Phony Accounting and Shadow Money
MarketWatch says Watch out for China’s ‘freak’ economy
Ten years ago, homes in Shanghai sold for about six times an average family’s income. Today that’s 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.
And it works fine until the music stops. Where are we now?
Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.
In the past two and a half years, China has witnessed a staggering credit bubble. Total lending has come to about $7.8 trillion.
To put this in context, that is twice the entire net government debts of the European so-called “PIIGS” — the troubled countries of Portugal, Ireland, Italy, Greece and Spain — put together.
An alarming report from Schroders said Chinese banking operates in a “twilight zone” of phony accounting and shadow money and it’s all coming apart. “Almost half of all credit creation in China is off balance sheet,” wrote the team at Schroders.
They think this situation could unravel “over the next three to six months,” producing a huge crisis with international implications. Most Chinese banks, they predict, will end up as “zombie banks.”
Hard Landing Coming
The Financial Times reports China property developer warns on price falls
China's largest real estate developer believes the country's property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices volumes decline further.
China Vanke, the country's biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volume in 14 of the country's largest cities halved in September from a year earlier.
A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country's investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.
Property investment accounts for more than 20 per cent of total fixed investment in China and UBS estimates almost 30 per cent of final products in the economy are absorbed by the property sector.
"A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now," Ms Wang said.
Debt-laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects in recent years.
These local authorities also account for up to 30 per cent of all outstanding bank loans, many of which are collateralised by land and housing developments, so a collapse in the property market could have a devastating knock-on effect on the financial system.
The property bust is underway in China and will spread from city to city just as it did in the US. No city will be immune and commodity prices will be smashed in the downturn.
If you’re an investor who believes high inflation is just around the corner and who sees rare coins as a terrific inflation hedge, as they’ve been in the past, now’s a great time to get into the coin market. After a block buster World’s Fair of Money trade show, produced by the American Numismatic Association in Chicago in August, the rare coin market has simmered down a little. Gold has backed way off its $1900 per ounce high seen at that time, softening outside investor psychology for gold and rare coins. However, there’s still a huge pent up demand from those in the know for high end premium quality rare coins. But while trading has been tempered a little, it is still very active and a good time to buy.
Back during the 1970s, when we went through our last high inflationary period, during the Jimmy Carter years, investors were throwing money at coin dealers saying, “Buy me some rare coins.” The market exploded, sending some coins that could be bought for less than $300 dollars in 1977 to nearly $3,000 in 1980 – really! And this was not the exception – it was typical! Market values became distorted as the investor-driven coin market veered away from the fundamentals that make the market what it is – a collector-based market.
Huge overall dealer profits were also reinvested into rare coins at that time, further fueling the coin market, because after all, that’s what we know and do with our money as coin dealers – invest in inventory. After those heady days, the coin market did experience a bubble, but only after fortunes were made in the coin market. Those who lost got in late or took a flyer, not knowing what they were doing. Learning about the coin market is the key to success.
Will a runaway coin market happen again? It very well could, and we have much more positive fundamentals going for the coin market this time around. During the mid-1980s, PCGS, the Professional Coin Grading Service, and NGC, Numismatic Guaranty Corporation, were formed. Today they are the backbones of this industry in terms of coin grading, which is one of the fundamental basics for valuing rare coins. This has led to much strengthened consumer protection and confidence in owning rare coins, unlike the days prior to this era when individual coin dealers would grade their own coins they had for sale. It’s easy to see the abuses and legitimate differences of opinion dealers and collectors had during those days of self-grading, which were based on individual interpretations of standards outlined in coin grading guides.
PCGS and NGC have also given collectors, investors, and even dealers, more confidence in owning expensive rare coins, and because of those services it’s much easier for everyone, these days, to buy and sell coins. However, third-party certified coin grading has also allowed inexperienced coin dealers to quickly enter the market and set up shop. So, choose your dealer wisely. Additionally, on the wholesale or dealer-to-dealer side of the coin market, there are dealers who are market makers for certain coins. This was true before the advent of certified coin grading, but, unlike those days, today some of these market makers will buy many rare coins on a “sight-unseen” basis, without even looking at them, just by relying on the certified grades assigned by the grading services. This isn’t true of all certified rare coins, but this factor is present in the market for certain select rare coins.
Another huge factor in the coin market, that’s become a great backbone of the industry, that wasn’t around for the public during the 1970s, is the Internet. This tool has given collectors and investors a great information resource for learning about rare coins that the market didn’t have during the last inflation-investment surge. It’s also facilitated much greater coin trading online via auctions and inventory offerings for dealers and even collectors who have been enabled to sell their coins themselves online. But there’s a learning curve for new collectors and investors, and even experienced collectors who want to venture into new areas of collecting. What greater resource could there be for this information besides the Internet? Again, the coin market didn’t have this beneficial tool during the inflationary investor market of the 1970s.
Coin price guides have also improved since that time, and the Internet has also given collectors, investors, and dealers another great tool for research – an easy way to access auction records of rare coins. However, sometimes researching auction records is an easy task and sometimes it takes much sophistication in knowing what’s going on in the coin market. As the market analyst who established values for all rare coins for the largest price guide in the industry during the bull market in coins in the 2000s, I believe rare coin pricing is the next frontier to be perfected, as best as it can be, during the coming years, much in the same as coin grading has been perfected since the mid-1980s. Again, for the best help, know your dealer and his or her experience level.
So, while not absolutely perfect, the rare coin market is probably the most structured and efficient of all the collectible, inflation-hedge markets in existence. People can trade rare coins within a fairly narrow trading range, compared to other collectibles, and there has always been a ready market for coins at some price level, even in a down market. Rare coins have always been very liquid at the right price points.
Of course, as a life-long dealer in rare coins, who’s also had a couple of career digressions, into coin grading for PCGS and coin pricing for Coin Values magazine, I’m biased toward the rare coin market. But take a look at stock brokers and real estate brokers, for example. They’re biased toward their own areas of endeavor and often talk down other markets, like rare coins and precious metals. What are we hearing today? “The gold bubble has burst!” But haven’t we been hearing this from traditional investment advisors during the last ten years as the gold price has continued to climb, outperforming most traditional investments?
Yes, the gold bubble probably will burst at some time in the future, and maybe it will again for rare coins, but only after the economy goes through the coming inflationary years and fundamental changes are made to reduce the world-wide debt bubble. But until those days are upon us, rare coins will likely prove to be a great inflation hedge during the coming years. Government spending cutbacks are what are needed, but we haven’t seen Congress develop the backbone and cohesiveness to pull this off. Reduced living standards and protests will result with the needed cutbacks, and even banking and housing crises and social protests might occur before the needed austerity measures are taken. Sound familiar? We’re already seeing the beginning of all that.
The federal debt is continuing to grow. Deficit spending is occurring every year, adding to this debt, and the temporary way out of this problem, to contain social unrest and financial crises, has been to print more money. Clearly this can’t continue indefinitely, but it likely will for years to come, creating progressively higher future inflation. It’s already starting. As I’m writing this, today’s Wall Street Journal, for example, contained several reports of higher inflation in this country and around the world. Gold and rare coins have served as stellar inflation hedges during inflationary spiral, like the one we’re entering now.
Last week, Jeff Reeves wrote about five exchange-traded funds that have held up well during the rocky market environment of the past few months. Now, let’s take that one step further: Of the roughly 1,300 ETFs currently available for investors, which are among the best bets to buy now and hold for the next three years?
The three ETFs are similar in that the strength in their underlying, long-term themes should enable them to overcome the various near-term concerns that drive market performance on a day-to-day basis. At the same time, their soft one-year returns provide investors with the opportunity to take advantage of these themes while prices are somewhat depressed.
Global X Brazil Consumer ETF (NYSE:BRAQ)
One-year return through last Friday: -27.14%
The emerging markets consumer story is no secret. Rising disposable income, low credit penetration, young populations, and solid economic growth makes the “rising domestic consumption” story one of the most compelling long-term themes in the market today. Emerging markets already have a larger share of consumption than the developed world, and this gap is set to explode higher in the years ahead.
Brazil is at the forefront of this trend. Over 60% of its economy, which is now the 10th-largest in the world, is driven by domestic consumption. Like most emerging market countries, Brazil features a rising population, robust wage growth, and increasing personal wealth. However, Brazil also has two other important attributes. First, it has a relatively low exposure to the problems in Europe, and second, its stable economic and political management limits the potential for negative surprises. As a result, the country stands apart from its peers in both the developed and emerging markets.
More important in the case of this ETF, Brazil is still seen as a commodity play. Its market therefore sells off when commodity prices weaken, as we witnessed in the middle of this year. This creates an opportunity benefit from discounted shares of companies that operate in the huge segment of the Brazilian economy that isn’t directly commodity-related.
There’s no doubt that BRAQ is small and volatile, but it offers investors a way to take advantage of one of the most important trends in the BRIC asset class and the global economy as a whole – and to do it at a price well off its high for the year. Having said that, BRAQ has rallied sharply from its early October low, indicating that a measure of patience is advisable here.
iShares S&P Emerging Markets Infrastructure ETF (NYSE:EMIF)
One-year return: -17.78%
EMIF is another way to take advantage of a situation where the long-term theme remains intact but the related ETF has fallen sharply due to broader macro concerns. Emerging markets countries continue to build out their infrastructure to accommodate enormous societal shifts. In China, for instance, the urban population is projected to grow by 530 million people in the next 20 years. Compare that to the U.S., where the total population is about 307 million.
Emerging markets also have vastly better government finances than the developed world. Unlike the U.S. and other major world powers, the emerging markets actually have the cash to put to work. And thanks to the ultra-low rate environment put into place by the world’s largest central banks, corporations have a lower hurdle rate in order to invest in new projects. Notably, emerging market governments have already committed well over $3 trillion to future projects, creating a large backlog of potential revenue for companies that build roads, electricity networks, and water-related infrastructure.
Stocks of these companies have much to gain in the coming years, and EMIF provides a way to capitalize on the trend and still maintain diversification on the geographic and individual company level. In addition, it offers a nice yield of about 3.5%. As with BRAQ, the stock has staged an impressive relief rally in recent weeks, so it may pay to wait for a pullback.
Market Vectors Uranium & Nuclear Energy ETF (NYSE:NLR)
One-year return: -15.95%
The largest reason for the underperformance of nuclear and uranium-related shares is the Japanese earthquake and lingering fears that countries are going to abandon their commitment to nuclear power in favor of safer options. Germany made headlines when it abandoned its nuclear program, obscuring the fact that China, India, and Russia have made no such shift. The rising power demands of the growing emerging market population is a longer-term trend that remains firmly in place, and NLR – which holds uranium miners, utilities, and stocks of companies that build nuclear plants – is uniquely positioned to benefit. As a kicker, the ETF offers a yield north of 5.5%.
It’s also notable what didn’t make this list. Some of the worst ETF performers of the past year are inverse funds and those tied to the performance of and the alternative energy industry. While their price performance may indicate an opportunity, both segments remain dangerous propositions. Inverse products are unsuitable for a long-term holding period due to the compounding of tracking error, while the combination of fragile finances of developed-market governments to provide political support makes alternative energy stocks little more than a crapshoot at this point.
Conversely, the three ETFs mentioned here offer the ability to take advantage of some of the most important trends in the global economy. Investors who can hold on through the inevitable bumpy ride should be well-rewarded in the coming years.
download it here
When Will The Grain Market Get Nervous About The Fact That The Drought In The S. Plains Is Moving Into The Western Corn Belt?
from King World News:
With gold trading around $1,730 and silver near $35, today King World News interviewed Ben Davies, CEO of Hinde Capital, to get his take on where the gold & silver markets are headed. Ben sent KWN the above chart on gold and commented, “You really don’t need to say much when you look at the chart, it’s extremely bullish. We took the current year and pushed it forward four weeks to adjust the seasonality. We realized that the market was working on a four week basis ahead of time and if we adjusted the seasonality by bringing it forward four weeks, readers can see that come October we were going to actually have a rally into the year end. Historically you would tend to see a dip in October, but we already had that dip in September.”
Ben Davies continues: Read More @ KingWorldNews.com
The dark red shading in the table below represents between two and three standard deviations above the sector’s 50-day moving average, and moves into this range are considered extremely overbought. As shown, not only are all ten S&P 500 sectors overbought (at least one standard deviation above the 50-day), but 8 out of 10 are in extreme territory. The Financial sector is the most overbought of them all at three standard deviations above its 50-day. The Materials sector is the least overbought at just under two standard deviations above its 50-day.
There are many different ways to measure debt as a factor in a nation's economic health. In fact, there are so many that we can sometimes lose the meaning of any one measure. In this article, we'll look at two different measures of debt and how they change the landscape of the most indebted nations.
Debt Compared to Cash Coming In
One of the most popular, measures is debt as a percentage of GDP. This tells you how likely it is that a nation is going to be able to pay its bills. In this sense, GDP is income, so the more GDP you have, the more debt you can service.
As far as measuring which nations are struggling, the debt to GDP is an excellent measure. The public debt to GDP listing, compiled in the CIA World Factbook, is reassuring in this sense. It's top 10, based on 2009-2010 data includes:
1. Zimbabwe 234.10%
2. Japan 197.50%
3. Saint Kitts and Nevis 185.00%
4. Greece 142.80%
5. Lebanon 133.80%
6. Jamaica 126.50%
7. Iceland 126.10%
8. Italy 119.10%
9. Singapore 105.80%
10. Barbados 102.10%
The United States is far down the list at number 32. The U.S. has the highest GDP for a single nation, in other words, excluding the E.U.. The U.S. GDP hasn't come in under $1,400 billion since it broke that level in 2007, so the debt situation of the U.S. isn't as bad in this context, when compared to Japan. Japan has a GDP of around $4,300 billion and public debt over $10,000 billion.
The reason that Japan hasn't folded, is that over half of all Japanese debt is held domestically. This gives Japan the advantage of relatively friendly hands holding its IOUs. There is also another economic advantage that economists see in the Japanese situation: most of the interest payments on the debt, make citizens wealthier and more likely to buy things domestically. This makes some sense, but the theoretical domestic buying boom either hasn't yet hit its stride in Japan, or the debt situation has grown beyond the point where this beneficial side-effect is noticeable.
Japan's woes aside, the debt picture shifts quite noticeably when, instead of looking at debt-to-GDP, we focus on external debt.
Measuring External Debt
External debt is a measure of the public and private debt, that is owed to non-residents. This list, also compiled by the CIA, gives a different top 10.
1. United States $13,980 billion
2. European Union $13,720 billion
3. United Kingdom $8,981 billion
4. Germany $4,713 billion
5. France $4,698 billion
6. Japan $2,441 billion
7. Ireland $2,253 billion
8. Norway $2,232 billion
9. Italy $2,223 billion
10. Spain $2,166 billion
Now, there is no reason to panic, despite the U.S. taking over the top spot. The foreign holdings of treasuries total about $4,500 billion, so this is not all public debt, by any stretch. Unlike domestically held treasuries, however, the external ones are making interest for non-citizens, making it less likely that the money will be put back into the economy in any way. In the end, external debt just means interest and principle payments that are going abroad and adding to another country's GDP.
How Did We Get Here?
The U.S. has a lot of external debt, true. There are two ways of looking at it, one is the debtor nation view, where the more external debt a nation has, the more likely it is giving away its future, in the form of interest payments to foreigners. The second way is the investment destination view, where so many foreigners are looking to lend and invest in the debts of U.S. citizens, companies and the government, that the low interest loans can be used to build more economic capacity, to produce more capital to pay off these cheap loans.
The truth is that the U.S. is a bit in between the two scenarios. It's strong GDP numbers make it one of the most attractive investments compared to other struggling nations, but this huge foreign debt load has passed the healthy level and is edging up to dangerous levels. Just because other nations are willing to lend cheap, and the U.S. is willing to spend, doesn't mean there aren't long term consequences.
The Bottom Line
Debt is a matter of perspective. The health of a nation is not so different from the health of a business. If a nation is borrowing to build infrastructure that will pay off in the future, then having a lot isn't necessarily bad. If, however, the money is being poured into areas with little or no return, then the burden on the economy to pay those debts will eventually lead to more economic hardship in the future. A fair assessment would involve tracking what each dollar of private and public debt, goes towards purchasing. Some studies exist on this subject, but it is best left for another day, perhaps Halloween.
Friday, October 28, 2011
Several European nations have already been downgraded and if several nations begin defaulting on their debt, the results could be devastating.
That devastation would first plague the European countries, then soon seep its way into our own nation. According to Douglas J. Elliott – fellow at the Brookings Institution – a European recession would have a domino effect and create a similarly dismal situation right here in the U.S.
These four crucial American sectors would be greatly (and quite negatively) affected in the aftermath of defaulting nations in the euro zone:
Business and consumer confidence: Good luck finding any business owner, employee or consumer who isn't already frightened about what's lurking ahead. If the worst-case-scenario does occur, our economy would surely experience even worst consumer spending cuts and job losses.
There's still hope; not much, but some. CNNMoney reported that there is a 25% chance of that worst-case scenario coming to fruition. That process would bring about a series of defaults in nations including Portugal, Greece, Ireland, Italy, and Spain.
Trade: If Europe falls into any deeper of a recession, our $400 billion exports would be slashed badly as well. Until Europe could afford to pay for those U.S imports, America would suffer the loss in sales and, conversely, be forced to cut jobs in related fields.
On a global scale, other countries who rely heavily on exports to Europe would face the same situation – leaving the global trade market in a rather dire position.
Investment: Economic data shows that American firms have more than #1 trillion of direct investment in the European Union. A major hit to Europe's economy would slash through investor profits. Our investments in other countries would also be affected because of the overall domino affect in the global investing community.
Financial flows: Banks and bank subsidiaries have about $2.7 trillion in loans and commitments to governments, corporations, and governments in Europe. An additional $2 trillion “more of exposure to the United Kingdom.”
The progress we've made in dealing with our own financial crisis thus far would be demolished in lieu of further credit losses.
But who knows, they say every cloud has a silver lining. Perhaps Europe's leaders will come together this week and have some good news with improvements on the way to combat the core of the problem. A little imagination, innovation, and level-headed reason-ability can go a long way...
The technical details of the recapitalization will matter as well. If designed badly, the plan could even do harm by encouraging European banks to cut back on lending and to sell existing assets. A serious credit crunch would likely plunge Europe into recession.
Finally, strong-arming investors into "voluntarily" accepting losses of 40% to 60% on their Greek government bonds will certainly add to the risks of contagion if market concerns about other troubled eurozone countries spike again at some point.
Whatever happens this week, the U.S. government would be wise to prepare and encourage the Europeans to take the necessary steps.
Not to mention the International Monetary Fund that could continue assisting a bailout in Europe.
While we certainly aren't happy about spending our tax dollars for Europe's problems, maybe it'll come back to help save us from further economic disaster in the long run.