Friday, May 27, 2011

Former Comptroller Walker: US in Worse Shape Than Italy, Spain

The European debt crisis is gradually spreading to Spain, and some experts say it will hit Italy soon enough. But both nations are in better financial shape than the United States, according to former U.S. Comptroller General David Walker, now head of the Comeback America Initiative.

“Italy and Spain have a higher rating for fiscal responsibility and sustainability under the new Comeback America index than the U.S.,” he tells CNBC. “The question is when are the markets going to come after us.” 
With U.S. government debt totaling about 100 percent of GDP and growing $4 billion a day, Washington must implement a combination of spending cuts and tax revenue increases, Walker says. 

"We're not going to grow our way out of this problem," he says. 

Spending cuts need to be increased, Walker says. “Republicans were talking too low a number for cuts, but too quick,” he says. “We need more budget cuts but over a longer period of time.”

As for taxes, “We’ll have to broaden the tax base and significantly lower the rates — 51 percent of Americans don't have any income taxes,” Walker says.

Former Federal Reserve Vice Chairman Alan Blinder also is concerned about slashing spending too quickly. 

“Suppose the federal government actually does reduce its expenditures by 40 percent overnight,” he writes in The Wall Street Journal. 

“That's an enormous fiscal contraction for any economy to withstand.” 

Celente Predicts Gold Standard Won't Save US Economy

Sometimes controversial trends analyzer Gerald Celente is forecasting that a return to the gold standard will not be enough to save the US economy from collapsing.

Celente is the publisher of Trends Journal and a consultant and adviser to many of America's top corporations. Celente has no ax to grind and calls himself a political atheist. An author, Celente appears regularly on many of the mainstream media's most watched news programs. He is prolific with his predictions on emerging trends concerning global finances and major historic turning points.

U.S. at Risk of Default as Cost to Insure U.S. “Ponzi Scheme” Against Default Rises Sharply

by Mark Obyrne  ~ GoldCore Limited ~
Gold and silver are lower today with profit taking, Chinese bond buying and increased risk appetite being cited for the price falls. Gold is marginally lower in all currencies and is 0.2% lower in U.S. dollar terms despite the dollar coming under selling pressure again this morning. Risky assets have recovered somewhat from recent losses with Asian and European equities and commodities receiving a bid.

Cross Currency Rates

Reports of China buying Eurozone government debt may have led to a rise in the euro and equities. However, the scale of sovereign debt risk internationally is such that even significant and ongoing Chinese buying would be unlikely to contain the crisis.

Sovereign debt risks in Europe and internationally continue to threaten the increasingly fragile economic recovery.

While most of the focus has been on Greece and Eurozone sovereign debt issues, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt.

Risk of a U.S. default can be seen in the credit default swap (CDS) market. 
1 year U.S. CDS has risen from 23 to 37 or by 60% in the last six trading days (see chart below). According to this measure, the U.S. is now more likely to default than Slovenia and Indonesia in the next year.
US CDS 1 Year – 3 Month Duration – US (brown), Japan (Yellow), UK (Purple)

In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. The U.S. is considered more likely to default in 5 years time than South Africa, Malaysia, Panama, Brazil and Colombia.

Credit default swaps on U.S. debt saw a flutter of activity in the past week with investors placing 135 trades in U.S. CDS in the week ended May 20, far above previous weeks, when in some cases only one contract trade was seen.
This compares to 360 CDS trades in the week on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy.
Volumes in U.S. CDS have been ticking up, though at about $4 billion they remain significantly lower than the $9 trillion in outstanding U.S. Treasuries.

The squabbling between Democrats and Republicans last week as the U.S. debt ceiling of $14.3 trillion was being reached did not help sentiment towards U.S. debt.

Gold Bullion in US Dollars – 30 Days (Tick)

Nor did former Soros’ partner Stanley Druckenmiller, the billionaire former-hedge fund manager and legendary investor, comment in the Wall Street Journal that the Federal Reserve’s bond purchases are a fraud and a “Ponzi scheme”.
He advocated a U.S. default or a technical default, saying “"technical default would be horrible, but I don't think it's going to be the end of the world. It's not going to be catastrophic."

Credit default swaps are far from a perfect way to establish credit worthiness and risk of default of countries. However, it is arguable that quantitative easing and governments internationally, including the US, electronically creating money in order to buy huge tranches of newly created government debt has significantly distorted the government debt markets. Thus, record low yields are artificial and are not a good way of measuring fiscal and monetary risk.

The market manipulation that is QE1, QE2 (and possibly QE3, QE4 etc.) has completely distorted the free market in U.S. government debt and indeed all capital markets. It has led to artificially low interest rates in the US and internationally.

It has been successful in the short term in keeping yields low but short term panaceas have a habit of becoming long term illnesses.

While a US default would not be “catastrophic” it would likely lead to a very sharp fall in the U.S. dollar, (especially versus the hard currency, collateral and monetary asset that is gold), sharp fall in U.S. bonds and sharply higher interest rates.

This has the potential to create another systemic crisis involving sovereign nations and banks globally and could lead to a deep recession, a Depression and in a worst case scenario - hyperinflation

McAlvany Weekly Commentary

Debt, Derivatives and Dominoes

A Look At This Weeks Show:- Why is gold at new highs in the British Pound and the Euro?
- If the dominoes of Greek and Portuguese debt defaults fall, it won’t sink the Euro ship. But if Spain goes next…lookout.
- The “Battle of Frankfurt vs. Wall Street”: Who wins, who loses and how is  Goldman Sachs involved?

Is The Dollar Headed For A Bounce?

When the Fed closes the door on its latest stimulus, will that lift pressure on the battered dollar and jumpstart a sustained recovery for the greenback?
Well, probably not.

The Fed initiated its $600 billionbond-buying program, known as QE2, in November as a way to stimulate the economy while keeping interest rates low and spurring more lending and spending.
The Fed haters, of which there are many, saw it slightly differently. They worried QE2 would keep long-term interest rates too low for too long and further weaken the already puny dollar.
Now, the end of QE2 might lift some of the downward pressure on the dollar. But probably not enough to spark a swift appreciation.

The upside of a down dollar

"With QE2 ending, maybe that downward pressure subsides a little bit," said John Derrick, director of research for U.S. Global Investors San Antonio. "But the Fed really isn't reversing course."
GDP growth remains lackluster, and unemployment rates are still at elevated levels. As a result, the Fed shows no signs of tightening monetary policy and hiking interest rates.
"They are still being relatively accommodating and that continues to put pressure on the dollar," Derrick said.
And in a broad sense, when the U.S. economy is not hitting on all cylinders, that means a weaker dollar, Derrick said.
"The economy hasn't really picked up, bank lending hasn't picked up, and I don't really see data that suggests otherwise," he said.
Plus, it's difficult to tease out just how much of an impact QE2 had on the dollar, since the months following the program's implementation have been a tad ... rocky.

Will Goldman kill the dollar?

The Arab spring remade the Middle East and North Africa. Japan was hit by a killer earthquake and tsunami. And there are renewed fears aboutsovereign debt problems in Europe.
All that unrest lends support to the dollar, as investors seek out traditional safe-haven currencies, contributing to a trend that has left the dollar little changed since the start of QE2.
In November, the dollar index, which measures the U.S. currency against a basket of other international currencies, stood at 77.3. On Wednesday it closed at 75.9. That's not much of a drop.
And while the dollar is little changed since the start of QE2, so is the broader economy, something Derrick said will keep pressure on the Fed to do something -- maybe QE3.
"Things just haven't been better," he said "If you have 1.5% or 2% GDP growth, that puts a lot of pressure on the Fed to do something." To top of page

Name of the game is commodity trend-line break: POT, MOS, WLT, CLF

HCPG Blog We’re seeing a ton of patterns like the following.   It’s a great pattern for commodities coming off the bottom.  You don’t get the exact bottom but often a nice meaty move.      Here are a few that have already triggered (and have been in our newsletter — strategy was swing long into the break) and a few that have not broken yet for your trading pleasure: Happy to have the commodities back for a trade  (also note the Ag theme –we like Potash and Mosaic $POT $MOS)

Marc Faber Says Prepare for War, Inflation…What About Pestilence?

Famed doomsayer Marc Faber did not disappoint at the Ira Sohn investing conference Wednesday.
In a wide-ranging presentation filled with shots at Ben Bernanke and the Fed commissioners, Faber predicted the Fed will continue to print money.
That means cash and bonds should not be considered safe assets.
He also ominously predicted escalating tension with China and in the Middle East: “You have to prepare for the next war, and, in war commodities go ballistic.”
He urged investors to diversify assets and hold everything from precious metals and commodities to real estate and equities.
And if they hold gold, it might be good to spread their holdings all over the world — Australia, Switzerland, Singapore, Beijing.
“You have to prepare yourself. Diversify.”

T-Note Rally Sniffs Even Harder Times Ahead

Our end-of-world date came a few days later than preacher Harold Camping’s, but it looks like we were both wrong.  Unlike Camping, we were not so much concerned with the wrath of God — which, one fervently hopes, has been amply vented by the spectacular irruption of natural disasters visited upon the planet and humankind lately. Rather, our chief worry concerned the potential top that we saw forming in the 10-Year T-Note.  Not exactly the Rapture, let alone Judgment Day, but perhaps troublesome enough to set the world’s financial system on course for its own day of reckoning. For if prices for Treasury paper are indeed topping, and yields therefore bottoming, then scores of millions of debtors are about to be squeezed to the brink of insolvency.
Perhaps we needn’t have worried. Yesterday, the June 10-Year T-Note futures finally hit the 123^21 rally target we’d proffered weeks ago by way of a Rick’s Picks trading “tout.” Then, in apparent defiance of natural law and the black artfulness of our proprietary Hidden Pivot analysis, they continued higher.  Not much higher, to be sure, but higher enuf to suggest that the preference of buyers for “safety” over risk is unlikely to abate over the near term.
Bailing Out of Short
Well in advance of this by-now fabulous surge in Ten-Year paper, we’d told subscribers to get short at the projected top, but with a very tight stop-loss of five ticks.  We reiterated this cautionary note in the chat room yesterday after a phone conversation we had with our friend Doug B, an occasional contributor to this site. Doug mentioned that the good folks who brought us QE1 and QE2 were contemplating something a little different for QE3 – i.e., a 1950s- style targeting of rates on the 10-Year Note. Presumably, this would be instead of trying to mop up growing quantities of debt elsewhere along the yield curve, or of trying to push administered rates lower than…zero.
It’s hard to predict what a further surge in the 10-Year Note will mean for the fragile ecology of the financial world, but it would seem to augur further delay in the collapse of  The System. A drift in yields down to 2.5% or so also suggests that investors think QE3 will be as big a bust as QE2 where resuscitating the economy is concerned. Whatever the case, we bailed out of our short-lived short in T-Notes five painless ticks above the entry price. Putting aside the Fed’s rumored intention of stabilizing the 10-Year above all, we remain bearish on the dollar. Yes, it has been sold almost to death and deserves a dead-cat bounce every now and then. But merely because “everyone” hates the dollar is not sufficient reason to believe it cannot continue lower.  Meanwhile, if the best argument dollar bulls can make depends on weakness in the euro, or in a flight to supposed “safety,” then we’ll continue to hoot the bulls from the sidelines.

Bill Bonner, “The Mounting Debt of the US Empire Business”

by Bill Bonner
“Not much was revealed in the markets yesterday. Everything went up. The Dow rose 38 points. The price of oil rose above $100. And gold rose too – up $3. More evidence came in, showing that housing is weak. But no more evidence was needed. Want to make some easy money? Buy a house! Get a DEEP discount on a distressed sale. Then mortgage the house for 30 years at a fixed rate. As big a mortgage as you can get. The house will probably become even cheaper…but some time between today and 2041 your mortgage is sure to turn into a gift. The feds are trying to undermine the value of the dollar. Sooner or later, they’ll succeed…even beyond their wildest hopes.

Yesterday, the politicians debated proposals to stave off national bankruptcy – see below. All that was revealed was more evidence America is governed by fools and knaves; there too, no more evidence was needed. But we have a proposal. A brave, bold proposal that will solve America’s dollar crisis and protect the integrity of America’s public finances in a single stroke.

To put it in perspective. We begin with a news item. Robert Gates, America’s top military man, says the US will “lose influence” if budget cuts are made. We suspect Mr. Gates is ‘talking his book.’ That is, he’s got a book the size of War & Peace with the names of people and companies that benefit from Pentagon spending. Cutting back would certainly be a bad thing from their perspective. But would it be bad from the taxpayers’ point of view?

We will take the question in two parts. First, we wonder what, specifically, does America’s ‘influence’ do for it? We spend billions on garrisons in various remote and inconsequential parts of the world. We send troops to fight various ‘wars’ for no particular reason other than they are available to us. Presumably, we ‘influence’ people in direct proportion that we are able to give them money or spend money protecting them from rival groups. But what good is this ‘influence?’ No explanation has ever been offered.

America’s empire has always been a catastrophe from a financial point of view. The business of empire is essentially a protection racket. The empire establishes its pax…and demands tribute in return. It makes war often…to extend its market share and loot the losers. The US has never got the hang of it. It tortures a few people. It murders one or two. It invades. It occupies. It spends. But where is the payoff?

Some analysts claim that the imperial objective has always been the same – to keep the oil flowing at low prices. America’s civilization, such as it is, depends on it. But wait. Japan, Germany, and every other country on earth gets to buy oil too – on exactly the same terms. The US provides protection. But it gets no advantage from it. Influence, schminfluence. This is a bad business model. The sooner the US abandons it, the better.

Now to the other part. Not only is ‘influence’ worthless…it can be maintained only so long as the US doesn’t go broke. That was bin Laden’s insight; he realized that he could reduce America’s influence by suckering it into spending money it didn’t have on a war it couldn’t win. He was right. If the US continues spending at the present rate, it will be soon out of business. You can do the math yourself. Add a few more $1.5 trillion deficits to the national debt. In 5 years you add debt equal to 50% of GDP. Add that to the existing debt and round off at $20 trillion. Now figure an interest rate of 5%. Presto! You’ve wiped out two thirds of tax receipts on interest alone.

Even Members of Congress can see this train wreck coming. They’re talking about throwing some switches to move some of this debt to another track. Here’s the latest from The Wall Street Journal:

WASHINGTON – “White House and congressional officials said Tuesday that they were moving closer to a budget deal that would make a “down payment” of more than $1 trillion in cuts to federal deficits over the next decade. But Vice President Joe Biden said he told Republicans that they would have to back down from their position that the deal avoid tax increases. “I made it clear today…revenues have to be in the deal,” Mr. Biden said after a Capitol meeting with congressional leaders trying to negotiate a deficit-reduction agreement. Members of both parties say such a deal is needed to win support for an increase in the federal-debt ceiling. House Majority Leader Eric Cantor (R., Va.), a member of the bipartisan group, agreed that more than $1 trillion in cuts were within reach, but he said he remained at odds with the White House on taxes. “This House will not support tax hikes,” Mr. Cantor told reporters after the meeting.”

Hey, how do you like that? Talk. Talk. Talk. The feds claim to be getting serious about cutting spending, right? But one trillion over 10 years? How serious is that? When you are running trillion-dollar plus deficits EVERY YEAR? If deficits were to continue at the rate of the last three years, this proposal would mean additional debt of only $14 trillion rather than $15 trillion.

Serious? Not at all. And the most likely way the feds will finance these huge deficits will be with some version of “QE” – that is, by printing money. Which is why a 30-year, fixed-rate mortgage may be the best investment you can make.”

Market Only Down a Few % from Highs, but Market Sentiment Horrible

Usually market sentiment is a great contrary indicator at extremes.  For some reason, despite a market that has barely sold off (down less than 3% from the peak) the American Association of Individual Investors sentiment indicator is at lows not seen since August 2010.  You know what happened at that point.  Not sure why such a negative view - perhaps the news from Europe is weighing more on sentiment than U.S. stock performance.

Via Bespoke Investment