Although the stock market is the first place in which many people think to invest, the U.S. Treasury bond markets arguably have the greatest impact on the economy and are watched the world over. Unfortunately, just because they are influential, doesn’t make them any easier to understand, and they can be downright bewildering to the uninitiated. [This article provides you with an excellent understanding of what bonds are, the advantages of owning them and how to go about trading them.] Words: 1325

So says Michael J. McFarlin (www.futuresmag.com/) in edited excerpts from his original article.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

McFarlin goes on to say, in part:

What is a Bond?

At the most basic level, a bond is a loan. Just as people obtain a loan from the bank, governments and companies borrow money from citizens in the form of bonds. A bond really is nothing more than a loan issued by you, the investor, to the government or company, the issuer.

For the privilege of using your money, the bond issuer pays something extra in the form of interest payments that are made at a predetermined rate and schedule. The interest rate often is referred to as the coupon, and the date on which the issuer must repay the amount borrowed, or face value, is called the maturity date.

Who in the world is currently reading this article along with you? Click here

One wrinkle in the equation, though, is that not all debt is created equal with some issuers being more likely to default on their obligation. As such, credit rating agencies evaluate companies and governments to give them a grade on how likely they are to repay the debt (see “Good, better, best”).

Ratings generally can be classified as investment grade or junk. Anything that’s considered to be an investment grade, you would have a fairly high probability that you’re going to get your money back at maturity [but] the lower you go down the credit spectrum, the more risk there is of default and the possibility that you could have losses. Therefore, the lower the security grade you have, the more yield compensation you should have for taking that default risk.

[The above being the case,] if you purchased a 30-year U.S. Treasury bond (currently AA+ from S&P and AAA from Moody’s and Fitch) for $100,000 with a coupon rate of 6%, then you could expect to receive $6,000 a year for the duration of the bond and then receive the face value of $100,000 back. At least, that’s how a bond would work if you held it to maturity.

Trading Bonds

Rather than hold a bond to maturity, they also can be traded but, as a bond is traded, interest rates can change, so the overall value of the bond can change. If you bought a bond that has a 10% coupon and the rest of the market is fine with owning a 1% coupon, then someone is going to love to have that 10% coupon until maturity. Conversely, if you have a 1% bond and everyone else is expecting that the market in general will be at 10%, then you’re going to need to pay someone a lot of money to take that 1% bond instead of buying a new 10% bond.

Because coupon rates generally are fixed, to adjust for future expectations the price of the bond or note has to move up or down. If yields, the interest or dividends received on a security, go up, the price will fall to accommodate that higher yield; if yields go down, then price has to go up.

Why trade bonds?

Given bond characteristics, there are a number of reasons they may be attractive for active traders:

1. liquidity,
2. portfolio diversification and
3. attractive trading hours.

1. Liquidity

The U.S. Treasury futures market is gigantic and one of the most active and liquid markets in the world (see “A deep well,” below) and is an easy place to buy into or get out of because bid-ask spreads are very narrow.

2. Portfolio Diversification

Bonds, traditionally, have provided a more conservative type of investment than equities (see “Moving apart,” below). Treasuries tend to have a negative correlation to the equity market so, if the equity market becomes very fearful, Treasuries will tend to rally [and, as such,] is a place to hedge or diversify your risks from a portfolio perspective. [That being said,] though, this inverse relationship is not as reliable as say, gold and the dollar.

 

Bonds often rally on bad economic news and sell off on good news. A poor Gross Domestic Product (GDP) or employment report may lead the Federal Reserve to lower interest rates, leading to higher bond prices. Positive GDP and jobs reports or an inflationary Consumer Price Index report may indicate inflation will rise, causing the Fed to raise rates and push bond prices lower.

3. Attractive Trading Hours

The bond trading hours are attractive for two reasons:

1. the bond pits are open when most of those major reports come out and this is important because the bond market is a measure of interest rates, which are determined by economic conditions, so economic reports, especially those that measure the economy and inflation, drive the market.
2. it’s fairly easy to determine the most active trading times of the day…

Getting Started

The major Treasury contracts, five- and 10-year notes and 30-year bonds, are based on a 6% coupon rate equaling par or 100-00 as is the ultra-bond which is a 30-year bond that has at least 25 years left to maturity. Each full tick is worth $31.25; there are 32 ticks in a point or handle, equaling $1,000 per contract. Five- and 10-year notes also have 32 ticks in a point, but each tick is subdivided. The 10-year is traded in half-ticks with each half-tick worth $15.625, and the five-year is traded in quarter-ticks with each quarter-tick worth $7.8125. Because longer-term Treasuries tend to have higher yields, they tend to be more sensitive to interest rate movements. A news event that may cause a full handle move in the long bond typically results in a 16-24-tick move in the 10-year and less than a half-point move in the five-year.

Start with five- and 10-year notes, and trade multiple contracts [because] if traders can use a stop of one tick in five-years, two ticks in 10-years, then they can get entry prices you like, and lower your risk [and,] although there may be “less bang for your buck” than in the 30-year, there also is less risk. You can learn how to get in the market, manage your trade, eke out a few ticks a day. That’s unique because for guys that trade the S&P, that’s not really even an option. [In] addition, trading a second contract helps you protect your profitable trades…With a two-lot working, if the market goes your way one tick, then you can take one off, move a stop to scratch and then who knows what may happen.

Getting started in bond trading is just like learning to trade any other commodity. You have to observe all the different types of relationships to understand what it is you’re trading, and know how and why it moves the way it does.  Bonds don’t trade in a vacuum [and, as such,] you’ve got to be aware of the influences that are out there.

*http://www.futuresmag.com/Issues/2012/January-2012/Pages/How-to-understand-and.aspx

If you enjoyed reading the above article then:

Sign-up for Automatic Receipt of Articles in your Inbox or via FACEBOOK | and/or TWITTER so as not to miss any of the best financial articles on the internet edited for clarity and brevity to ensure you a fast an easy read.

Related Articles:

1. Gold Bullion, Stocks or Bonds: Which Have More Long-term Investment Risk?

In proclaiming buy-and-hold investing to be dead, the pseudo-experts masquerading as financial advisors have abandoned the fundamental principle of investing: buying undervalued assets – and then giving those assets the time necessary to mature. Instead, these charlatans have forced their clients to become short-term gamblers. Worse still, they are now consistently steering their clients toward the worst possible asset-classes, stocks and bonds, rather than the best ones [simply because they do not] understand the fundamental conceptual difference between risk and volatility. In a market populated by panicked lemmings, we cannot avoid volatility. However, we can and must reduce risk – which begins by building an allocation of history’s true safe haven asset, precious metals. [Let me explain more about what risk and volatility are and are not.] Words: 1080

2. Your Portfolio Isn’t Adequately Diversified Without 7-15% in Precious Metals – Here’s Why

The traditional view of portfolio management is that three asset classes, stocks, bonds and cash, are sufficient to achieve diversification. This view is, quite simply, wrong because over the past 10 years gold, silver and platinum have singularly outperformed virtually all major widely accepted investment indexes. Precious metals should be considered an independent asset class and an allocation to precious metals, as the most uncorrelated asset group, is essential for proper portfolio diversification. [Let me explain.] Words: 2137

3. Don’t Invest in the Stock Market Without Reading This Article First

History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul and James O’Shaughnessy has compiled data that stretches back to before the Great Depression…back-tested numerous strategies, and has come to some very intriguing conclusions. [Let me share some of them with you.] Words: 1325

4. What Does 2012, as an Election Year, Mean for Stock Market Returns? Here Are the Facts

Next year is a Presidential election year, and the stock market is almost always positive in election years. Right? At least that assurance has been a supposed truism for many decades, and repeated as fact each year in numerous interviews and financial columns. [Let's explore just how correct those assumptions really are.] Words: 367

5. Rosenberg: 7 Ways to Invest Given the Potential 8 Behavioral Changes Coming in 2012

The global economy is going to endure a significant deleveraging cycle as we move through 2012 – one that will affect most if not all parts of the developed world. It will be accomplished by some combination of default and write-downs, debt repayment and rising savings rates. [Below I outline 8 areas of behaviorial change to watch for in 2012 and 7 ways to invest in such a fluid economic environment.] Words: 1186

6. Market & Economic Cycles Suggest We’re in the Fall Season in More Ways than One – Here’s Why

The key to long term success in investing is understanding the difference between the “seasons” in the markets and the economy. [Let me explain the four "seasons" and why we might very well be in the "fall" season and, if that is indeed correct, why] it is time to pack away the summer allocations and break out the winter coats to hunker down for what may be a chilly 2012. Words: 1016

 

Asset allocation is one of the most crucial aspects of building a diversified and sustainable portfolio that not only preserves and grows wealth, but also weathers the twists and turns that ever-changing market conditions can throw at it. However, while the average [financial] advisor or investor spends a great deal of time carefully analyzing and picking the right stocks or sectors, the basic and primary task of asset allocation is often overlooked. [According to research by both Wainwright Economics and Ibbotson Associates and the current Dow:gold ratio, allocating a portion of  one's portfolio to gold and/or silver and/or platinum is imperative to protect and grow one's financial assets. Let me explain.] Words: 1060

So says Nick Barisheff (www.bmgbullion.com)  in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Barisheff goes on to say:

Asset allocation is usually taken for granted as being a mix of the three main asset classes: stocks, bonds and cash. Many investors believe that a broad mix of equities (financials, healthcare, utilities and telecoms), an exposure to foreign stocks, some emerging market plays, some bonds and a foundation of cash, equals diversification. However, this traditional approach is not only outdated, but also completely excludes several key asset classes such as foreign currency, real estate, collectibles,precious metals, natural resources and life settlements…(which should all be examined and, if necessary, rebalanced…annually because markets are constantly changing due to the unstable global economic climate). Also, as Figure 1 shows, the three main asset classes are all positively correlated. A portfolio that consists entirely of positively correlated asset classes cannot achieve optimal diversification.

Long-Term Trends

• Stocks: The Dow has experienced several cyclical up and down trends throughout the last century. Identifying which trend the market is currently experiencing is of paramount importance. For example, a 60-year-old investor allocating to stocks in 1968 would have been 87 before breaking even, adjusting for inflation, in 1995.
• Bonds: The bond portion of a portfolio faired just as poorly during the 1970s. Bonds are decimated during periods of rising inflation, and in the 1970s inflation rose to over 13%. A mutual fund bond investment fared even worse during that decade; the net asset value of a bond fund drops as inflation takes hold and subsequent interest rate rises eat into the purchasing power, and then the price, of the fund.
• Commodities: Perhaps more crucially, a portfolio limited to stocks and bonds during the 1970s would have missed one of the greatest commodity booms ever experienced. From 1971 to 1980, gold rose by 2,300%, silver by 2,400% and platinum by 900%, while oil rose 900%.

Changing Times Require Changing Mindsets

Most investors’ experience with investing is based only on the last cycle. They find it difficult to rebalance their portfolios in order to align them with changing trends, having become entrenched in one mindset…Today’s investors are convinced that equities will continue to provide superior returns during the next 20 years. Many feel the financial turmoil of 2008 is behind us, that the worst is over, and are blindly looking forward to further gains on the stock market. This mindset fails to acknowledge today’s financial reality.

Who in the world is currently reading this article along with you? Click here to find out.

In fact, economic conditions today are much worse than in the 1970s. Government spending around the world has exploded and continues to do so. Fiat (paper) currency supply, along with government debt in the world’s major economies, is spiraling out of control. The situation is worsening daily, and burgeoning inflation can be the only result.  Crucially, the world’s debt will inhibit governments from substantially raising interest rates– today’s economies couldn’t withstand a high interest rate environment. These are the reasons gold has risen constantly, year after year for nine years, and will continue to do so. In truth, gold isn’t just rising; fiat currency values are falling through debasement by their governments. The more dollars created, the less each one is worth. Gold protects investors against inflation, because it is a non-depreciating asset.

Equity markets are topping. From a purely analytical point of view we can see that equity valuations are high, and there is more potential risk than reward. It is time to rebalance portfolios.

The Dow:Gold Ratio

The Dow:Gold Ratio, which measures trend changes in the price of gold versus a basket of stocks as represented by the Dow, supports the idea that investors today should have an allocation to precious metals. Essentially, the Dow:Gold Ratio divides the Dow by the US-dollar gold price. Figure 1 shows that when the ratio is rising, as it did in the 1920s, 1960s and 1990s, portfolios should be overweight equities. When the ratio is falling, as it did in the 1970s and is doing today, portfolios should be overweight precious metals. Currently the ratio is 8.18:1 and, equally important, it is falling, meaning there is still plenty of time for investors to rebalance into gold and precious metals.

What is an Appropriate Allocation?

Today’s typical “balanced” portfolio, consisting of 60% equities and 40% bonds, will simply lose value year-after-year in real terms during the coming high-inflation cycle. According to a study by Ibbotson Associates, a 7% allocation to gold is needed in conservative portfolios and a 16-17% allocation is required for aggressive portfolios. Those amounts are required simply to have a balanced, diversified portfolio during stable times, i.e. strategic allocation.

From a tactical allocation standpoint, Wainwright Economics [read article here (1)] looks to gold as being a leading indicator of future inflation. In a high inflation environment, which the ongoing currency creation around the world all but guarantees, their conclusion is that you need 15% in a bond portfolio and the same percentage in an equity portfolio just to insure your investments against further inflationary damage.

Conclusion

The percentage mix is debatable; what is certain, however, is that the historic three-asset-class allocation mix is outdated, out of touch with today’s economic and financial reality and a recipe for loss of wealth. To protect your portfolio and preserve your wealth, a 5 to 20% allocation to precious metals is an absolute necessity.

*http://www.bmgbullion.com/doc_bin/8.1.11_Asset%20Allocation%20for%20Today_Formatted.pdf

Related Articles:

1. How Much Gold Bullion Should You Have In Your Portfolio?

We are reading a lot of hype these days about gold and the necessity to own it but only about 2% of ‘investors’ actually have gold in their portfolios and those that have done so have insufficient quantities to offset the future impact of inflation and to maximize their portfolio returns. New research, however, has determined a specific percentage to accomplish such objectives. Words: 1158

2. Which Gold and Silver Assets (and How Much) Should You Own?

It is no longer a matter of whether or not you should buy gold and/or silver but, rather, which type of investment(s) and how much. You don’t need a lot but you do need some – and here is a primer on just what type of investment vehicles are available and recommendations on just how much you should buy.  Words: 1086

3. Factors to Consider When Buying a Gold Bullion ETF

The label “gold bug” may suggest a kooky old man who spends a lot of time in his basement reading conspiracy theory newsletters. The truth, however, is that there are many legitimate reasons to trade in gold and its derivatives. Gold has been proven time and time again to be an excellent “safe haven” investment, a holding that will appreciate in value during times of economic uncertainty. As such, gold may offer some valuable hedging and diversification benefits for a long-term portfolio. Words: 1002

4. Americans: Which Gold/Silver Bullion Assets are Permitted in Your IRA?

Some physical gold, silver, platinum and palladium bullion assets, in addition to traditional paper assets, can be part of your Individual Retirement Account (IRA) or Roth account and they can be bought and sold with no tax consequence until you move money out of the account. [This short articles reveals just what bullion assets can, and cannot, be included.] Words: 573

Over the past two months stock markets have crashed around the world and gold prices have soared as global investors decided that the U.S. has lost its race against time. A new recession is upon us before we even half-closed the output gap left open from the last recession. It means even larger deficits and an even weaker dollar. The price of gold and Treasury bonds is telling us that a full-blown international bond and currency crisis is approaching.  There is no international policy mechanism available to stop the panic short of re-opening the gold window that the U.S. closed unilaterally and “temporarily” in 1971. [Let me explain.] Words: 3025

So says Eric Jansen (www.itulip.com)  in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

Jansen goes on to say, in part, and I quote:

The best opportunities for sustained recovery have been squandered. Now we’re in real trouble. Getting out of it will not be as simple as the print, spend, and wait policy formula of the past three years that has failed to spur growth, produce jobs, and get the economy going again.

The incipient recession that the stock, bond, and gold markets smell is not a so-called “double dip” recession. It is a mid-gap recession – a recession that occurs in the midst of an output gap – and it is a far more serious economic event than a recession that produces an output gap.

a) The Recession of 1983 Wiped Out Public Sector Debt

The U.S. has not experienced a recession inside of an output gap since 1938, except for the one produced on purpose by the Volcker Fed in 1983 [see chart below] to squeeze the last breath of life out of an inflation spiral that was showing signs of resurgence in 1982… The inflation of that period wiped out private sector debt — mortgage and credit card debt, auto and student loans, and corporate debt that had accumulated on household and business balance sheets over the previous decades. As a result, the Reagan administration started with a clean slate of low private sector debt levels, virtually no public sector debt, and a massive tail wind of falling interest rates that fueled the growth of the finance-based economy. By the end of Reagan’s first term in 1985, two years after the recession that ended in 1983, the number of unemployed had fallen from 12 million to 8 million as inflation fell from 15% to 3%. Reagan’s re-election bid was assured.

b) The Recession of 2009 Expanded Public Debt

Here’s is the same chart updated to August 2011. The so-called Great Recession, in contrast, was not manufactured to kill off an inflation spiral that wiped out a generation’s debts. It followed a seizure of the great credit machine that fueled the nation’s growth since the early 1980s and left it buried under a mountain of both private and public debt. The Fed cut rates to zero and via quantitative easing and other monetary tricks attempted to get the machine going again. Rather then exit the recession with private sector debt wiped out and public debt near zero as in 1983, in 2009 private debt levels were higher than ever, and deficit spending to stimulate the economy expanded public debt well beyond the already worrisome levels reached before the recession. The result is the outcome I warned about in 2009: high unemployment, high inflation, and high deficits. 

Who in the world is currently reading this article along with you? Click here to find out. 

Two years later more than 14 million Americans remain unemployed and consumer price inflation [see chart below] is officially over 3%, but is closer to 4% according to the MIT Billions of Prices Project price index [see article here on this method of determining inflation]. 

Yet for all of the printing and spending starting in 2009, and the Fed’s success at producing inflation as Bernanke promised, all evidence points to a recession by Q4 2011. In fact, the economy may have entered a recession in Q2. The evident downward trend in economic growth two years into recovery is highly unusual from a historical perspective. 

 Since the Fed is locked into a deflation-fighting stance, inflation will be maintained above 2% even as nominal growth declines to below zero. The result: negative 2% growth by Q4 2011.

We had two years to close a trillion dollar output gap, but we blew it. 

Yesterday’s cure is today’s disease

Money supply expansion via central bank operations, government spending, and direct cash injections into failing financial institutions stopped the financial crisis in its tracks. Fed chairman Ben Bernanke kept the promise that he made in his now famous 2002 speech titled Deflation: Making Sure “It” Doesn’t Happen Here to prevent a repeat of the deflation spiral and economic contraction that gripped the US economy from 1930 to 1933… In that speech [see below] he asserted that the misguided, ideological laissez-faire policy approach to the previous credit bubble crash in the 1930s would not be repeated on his watch and that, instead, an activist and radical reflation policy would be pursued. In addition, he made a reference to gold that he may regret today.

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

“What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

At the time Bernanke gave this speech I doubt he had any idea how prophetic his statement about gold and fiat dollars was to be after he executed his inflation plan five years later to fight off a post-crisis deflation spiral. 

[Unfortunately,] the “production of as many U.S. dollars as it wishes” by the Fed has not come “at essentially no cost.” Trillions of dollars of credit and money expansion ran head long into a few thousand tons of gold that cannot, in fact, be expanded rapidly and at no cost. Anti-deflation policy – a pro-inflation policy by any other name – weakened the dollar and every currency on earth, as we shall see, and exploded the gold price more than five-fold from $300 at the time of his speech to over $1700 at this writing. 

A consequence of government spending and zero interest rates is a depreciating dollar. The policy succeeded at boosting exports over the following quarters and years, but the immediate aim of dollar depreciation policy was not to improve the prospects of US producers but to halt asset price deflation in the FIRE sector [finance, insurance, and real estate] with cost-push inflation from rising energy import prices. 

A similar strategy that was executed by FDR under similar circumstances using gold instead of oil as the price anchor. In 1933 FDR halted a runaway deflation spiral by calling in gold and devaluing the dollar against gold by 70%…Without an international gold standard the unspoken strategy this time around was to not wait three years for deflation to get out of control but to move immediately via aggressive interest rate and fiscal policy to depreciate the dollar against oil – and so it was. 

The immediate impact of these policies was positive. Credit contraction and deflation stopped in their tracks…No serious economic observer argues that the policies that Bernanke envisioned and later executed were not necessary to prevent the economy from collapsing once the inevitable crisis began. 

The pilots who flew us into this hurricane were Alan Greenspan and the Reagan, Clinton, and Bush administrations that he served under. Bernanke did not have the option of compounding the error by putting the plane on autopilot and hoping for the best. That does not mean that Bernanke will not be the scapegoat for inflationary policies in the future. The real culprits here, however, are in the White House and Congress, who failed to follow emergency reflation measures with viable long-term solutions. 

Two years later we have the worst of all worlds. The U.S. economy is not “catching” and growing steadily under its own power as it must in order for monetary and fiscal stimulus to be withdrawn. Yet if stimulus is continued, consumer price inflation, nacent but persistently growing, will get out of control. 

Running out of time and options

I said in 2010 we had until 2011 at the latest to get the economy ramped up to a sustained 4% quarterly real GDP growth rate [and] suggested a way to do this by investing public funds into energy and communications infrastructure projects to boost growth to a 4% level. Rather than adding to the nation’s debt burden [such] government outlays[would have] produced a return on investment on borrowed taxpayer money by reducing the energy intensity of the U.S. economy, the number of BTUs of energy needed to produce a dollar of GDP. Such a reduction [would have been] as stimulative as a tax cut and for the same reason: household income devoted to fuel and food [would have been] freed up for spending on other goods and services. 

[Unfortunately,] we didn’t do [what I had suggested]. Instead, we:

• wasted the two years and trillions of dollars, mostly borrowed, on a haphazard and misguided mix of projects, from “Cash for Clunkers” to make-work maintenance of existing transportation infrastructure. 
• then we wasted more time arguing about whether the nation has too much public debt, when in fact public debt as a portion of total private and public debt outstanding is only 6% of total debt, down from 13% in the 1960s. Financial corporate debt, on the other hand, has over the same period grown from 2% to 37% of total debt.  It is this excessive financial sector debt that is weighing down the economy and preventing the economy from recovering at a high enough rate to close the output gap. It is why this recovery is unlike any other, and why every recovery since 1980 has been weaker and weaker, generating fewer and fewer jobs, and requiring more and more new debt growth to get the economy going again.
• finally, to cap two years of fumbling, Congress passed a bill to reduce government spending, a decision that can only slow the economy even further and make existing debt even more difficult to finance. 

Implications of the Mid-gap Recession

To understand the meaning of the new recession that is upon us it is important to get your head around the last mid-gap recession that happened despite muddled efforts to avert it.

The Great Depression happened in two parts [as shown in the chart below]. Part I was a massive recession that saw GDP decline by 25%. Part II was an output gap, the gap of between the potential output of an economy under conditions of low inflation and full employment. New Deal spending closed the gap from 24% to 14% of GDP. 

The New Deal stimulus spending was cut in 1937 after months of partisan bickering about the risks to the nation’s credit that deficit spending posed. Sound familiar? The spending reductions caused a new recession that widened the output gap to 17% of GDP. By the end of 1941, WWII spending, acting as gigantic public works project, closed the output gap and created a positive gap with high inflation. 

The current depression, like The Great Depression, is also happening in two parts. The 2008 to 2009 recession left a more modest output gap of 4% of GDP, thanks to the Bernanke Fed’s radical reflation approach. To close this gap by 2013, the economy needed to grow at an average of 4% per quarter starting in Q2 2009. 

 A combination of monetary policy and stimulus spending helped close the output gap to 2% of GDP by the fourth quarter of 2010 but growth has averaged only 2.5% of GDP since the recovery began in the second quarter of 2009, not the 4% we need to close the gap. At that rate, the gap is never going close – ever!

That, believe it or not, is the good news. Today the BLS revised Q1 GDP growth down from 1.9% to 0.4% almost no growth, and the first pass at Q2 growth is 1.4%. The past record of revisions during our feeble crawling-out-of-the-output-gap suggests another cut to near zero or negative growth is likely.

Deficit reductions spelled out in the Budget Control Act of 2011 virtually guarantee that the economy, already teetering on the edge of recession in the first half of the year, will fall into recession and contract in the second half of the year. 

This political acceleration into a mid-gap recession is occurring a full two years before my previous projection of a next recession occurring in 2013 if the U.S. fails to pursue a program of energy and communications infrastructure targeted, ROI producing stimulus programs. Once again, try as I might, just as I failed in 2001 to imagine that our leaders were crazy enough to create a housing bubble to bail the economy out of the fallout from the tech stock bubble, I was unable to think darkly enough to foresee the economic nightmare our leaders were capable of creating with alacrity. 

With the onset of a new recession, the current output gap will open further, and for nearly identical reasons as in 1938: fiscal stimulus was cut before the output gap was closed.

An output gap is the difference between the output of a productive economy running at full capacity and an economy running below capacity. Potential output is the old trend growth rate of the economy. It represents the good old days of 2006, with only two unemployed vying for each job opening, the prosperous economy that both producers and consumers – and investors – still hoped until July was just around the corner. Now they know it isn’t.

 The output gap we are in today is the difference between the actual output of the economy after the 2007 to 2009 economic contraction versus the potential output of the economy at full employment without inflation if the financial crisis and economic contraction had never happened. 

The gap created by the global financial crisis and recession must be – must be – closed before the next recession arrives to widen the gap further… If that is not accomplished the U.S. will find itself in an economic predicament far more dire than the one posed by the fallout of the financial crisis. 

If we don’t make the Q2 2011 deadline to get the U.S. economy moving again at a 4% annual growth rate the U.S. will run out of foreign buyers for its government debt and sooner or later face a full-blown debt and currency crisis. As the U.S. is at the center of the global monetary system, and over 80% of the world’s international transactions are dollar-based, a dollar crisis is a global economic calamity without precedent that will drag all other currencies down with it, with no quick-fix solution like the multi-trillion dollar global fiscal stimulus and bailouts that pulled the world economy back from the brink in late 2008 and early 2009. This second recession will put US finances on an even more precarious footing. 

When in 2009 I forecast a next recession for 2013, I said: “The other antecedent to recovery to keep in mind is government spending. We’re not supposed to worry about this because we’re going to grow our way out of it, but try to imagine what might happen if the next recession occurs before tax receipts recover to previous levels while government outlays are cut. We think it might go something like this. Might deficit spending to stimulate the economy in a next recession produce a $4 trillion shortfall, or 21% of GDP?”

I supplied the following as a warning of the consequences of a failure to avoid a recession before the US exits its post-recession output gap. 

In 1980 if the Fed was determined to stop an inflation spiral from developing into full blown hyperinflation then:

• interest rates had only one way to go: down;
• inflation had one way to go: down;
• the dollar had one way to go: up.

Today, the opposite is the case.

• interest rates have one way to go: UP;
• inflation has one way to go: UP;
• the dollar has one way to go: Down.

Conclusion

Gold is starting to look like a can’t lose bet to more and more market participants, including governments that are US political allies.

*http://www.itulip.com/forums/showthread.php/20308-Illusion-of-Recovery-–-Part-I-Print-and-pray-has-officially-failed-Eric-Janszen?p=207877

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

Why Gold is Better Than Cash

The question most often asked of gold bulls is, “At what price will you take your profits?” It is a question that betrays a lack of understanding about why anyone should own gold [in the first pace but,] nevertheless, the simple answer must be, “When paper money stops losing its value”. This response should alert anyone who asks this question to the idea that owning fiat cash is the speculative position, not ownership of [gold and silver]. Words: 1403

So says Alasdair Macleod (www.FinanceAndEconomics.org) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited [...] below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Macleod goes on to say:

Owning Cash is More Speculative Than Owning Gold – Not the Other Way Around

This sums up the problem. Instead of gold, people commonly think of paper money as the only medium of exchange and as a store of value; cash is after all their unit of account. They see the gold price rising when they should be seeing the value of paper money falling.  Because cash is everyone’s unit of account it is wrongly seen as the ultimate risk-free asset. This is also the fund manager’s approach to investment: his/her investment returns are calculated in paper money, so she/he cannot account for a superior class of asset.  He/she is also taught to spread investment risk across a range of inferior asset classes to enhance returns. Therefore the investment manager wrongly assumes that precious metals [i.e. gold and silver] is one of those inferior asset classes. All modern investment management works on these assumptions.

[The above] helps explains why managed portfolios today have very little exposure to gold and/or silver, but there are other reasons [as well]. Investment funds in total have grown rapidly since the 1970s on the back of money and credit creation.  This monetary expansion has fuelled both new funds for investment as well as asset prices generally, while gold and related investments became unfashionable [during the] twenty year bear market in gold between 1980 and 2000. The combination of these two factors reduced the exposure of gold and silver in managed portfolios to very low levels.  Gold was therefore ignored as an asset class when modern portfolio theory evolved in the 1990s, and gold is simply not considered by the current generation of fund managers.

Editor’s Note: Don’t forget to sign up for our FREE weekly “Top 100 Stock Market, Asset Ratio & Economic Indicators in Review”

Consequently, investment funds of all types invest in bond markets, stock markets, property assets, securitisations, foreign currencies and to a minor extent [in] general commodities.  From time to time they may have had temporary and speculative exposure to gold, but very few fund managers actually understand that gold is the ultimate hedge against cash losing its value.  After all, if you account in paper money, paper money has to be the risk-free position. The understanding that cash is not risk free is left to private individuals not misinformed by modern portfolio practice.

Private Individuals Now Beginning to Hoard Gold and Silver

The world-wide accumulation of hoarded wealth in the form of gold and silver ingots, coins and jewellery has been growing at an accelerating rate over the last thirty years. This has compromised the central banks who were actively suppressing the price: the result is that large amounts of gold and silver have passed from governments to private individuals. None of this can be properly captured in the statistics, partly because the central banks involved refuse to provide accurate information about their sales, swaps and leases, and partly because the individuals that hoard gold and silver do so secretly, and are therefore beyond the scope of meaningful statistics.

The reason individuals hoard precious metals is the basic hypothesis of this article: they will dishoard gold when paper money stops losing its value.  We should therefore consider the extent and speed of this loss.  In 1973 there were US$1,120 of demand deposits plus cash currency for every ounce of gold owned by the US government. Today, including excess reserves held at the Fed and the $600bn to be printed over the next seven months, the figure stands at $26,512. In 1973 there were twelve times as many dollars as there was gold at the market price, compared with nearly 20 times today, so paper dollars are more overvalued in gold terms today than at the time when the gold price was only $100.

A Banking Collapse is Inevitable

The quantity of paper money will continue to grow as the world wrestles with its problems.  As every day passes, one’s worst fears of yesterday materialise.  Governments, driven by social pressures rather than dispassionate economics, are forced into ever-increasing financial rescues; but by far the biggest problem facing them is the seeming inevitability of a full-scale banking collapse.

That is what has the panjandrums of Euroland in a panic over Ireland. We are told by the Bank for International Settlements that total Irish debt to foreign investors stands at $791bn, the substantial majority of which is owed by the banking sector. Ireland on its own might not derail European banks, but the domino effect of the spreading problem most probably will.

A banking collapse, obviously, cannot be allowed to happen. Forget the rights and wrongs of “too big to fail”: politicians and therefore central banks have no option but to intervene – but what can they do? They cannot fund a rescue with taxes, and they are already borrowing as much as the bond markets can stand.  There is only the nuclear option left, however it is dressed up: shore up the system by printing as much money as it takes. Printing money is simply the way governments buy time.

Gold Will Continue to Rise With Continued Acceleration in Printing of Fiat Currencies

This analysis may turn out to be unfortunately right, or hopefully wrong; but it is more right today than it was last month and also progressively so for the months before that. The rising interest in gold and silver is entirely consistent with the growing likelihood that the printing of fiat currencies will continue to accelerate in order to buy off default. While the translation of monetary inflation into price inflation is rarely an even result, we know from both economics and the experience of history that the two are linked as cause and effect respectively. So we can conclude that paper money will continue to lose its value for the foreseeable future.

Accelerating Price Inflation Will Adversely Affect ALL Asset Classes Except Gold and Silver

Accelerating price inflation, however, does not just affect cash as an asset class:

a) Bonds, which are commonly the largest component of a conventional portfolio, will lose value faster than cash.

b) Equities will be lucky to keep up with cash values while bond yields rise and the adverse effects of accelerating inflation result in recession.

c) Property will be hit by rising bond yields and rent increases that can only lag inflation.

d) Only commodities, which are a minor asset class for portfolios, can be reasonably expected to outperform cash…

e) History confirms that gold and silver are easily the best performers in times of rising inflation.

Conclusion

In the middle of today’s banking and economic crisis those unfortunates who have delegated the management of their investments to professional fund managers have only bought for themselves the illusion of financial security.  They are almost entirely exposed to cash and assets that are dependant on cash itself, because they own negligible amounts of gold and related investments. This means that systemically, portfolios have become totally dependent on the stability of fiat currencies.

Paper money may be the medium of exchange and the unit of account, but in these increasingly uncertain times gold and silver are the safest stores of value and will continue to be hoarded, irrespective of price, for as long as these uncertain times continue.

Gold and silver, not cash, are the ultimate risk-free investment class.

*http://www.financeandeconomics.org/Articles%20archive/2010.11.22%20gold%20and%20cash.htm

* http://seekingalpha.com/article/236123-how-to-protect-yourself-from-the-crash-of-2011?source=email_the_macro_view

The politicians in Washington tell us the economy is recovering. Well, maybe so … as long as you don’t need a job. The problems facing this country — in debt, energy, lost jobs, unbalanced budgets and more — continue to mount. In short, I think we’re headed for a head-on collision with hard times. Are you going to be ready? Words: 1386

So says Sean Brodrick (www.uncommonwisdom.com) in his original article.* Lorimer Wilson, editor of www.munKNEE.com, presents below further edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Brodrick goes on to say:

4 Economic Dark Clouds Are Gathering Over the Country:

1. Jobs Depression
Sure, sure, GDP is rising … on a tide of government spending. U.S. manufacturing is growing too, as long as you don’t mind that a growing slice of the parts used in “U.S.” manufacturing are made in China. Meanwhile, jobs are vanishing. Twenty-nine million Americans either can’t find jobs or can’t find full-time work. Do you think that’s going to improve as long as companies can ship American jobs overseas where someone will work for $3 a day? Heck, no. It’s going to get worse!

2. Budget Implosion
Yes, the national debt of the U.S. has doubled in less than eight years, but I’m sick of talking about the ballooning U.S. budget gap. For a different dose of awful, let’s talk about the states. Across America, states are running deep in the red, and together, face a shortfall of $156 billion in fiscal 2010, according to The Economic Policy Institute.

Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing severe funding crises, and they’re just the tip of the iceberg. The head of JPMorgan Chase, Jamie Diamond, says California’s $20 billion budget deficit is worse than anything facing Greece or other financially troubled countries in Europe. Since California is the world’s eighth-largest economy, that should set off alarm bells!

State budget deficits will likely be resolved with layoffs and budget cuts, which will hammer local economies and worsen the downward spiral.

3. Energy Crisis
After over 18 months of recession, world oil consumption is roaring back to its pre-crash peak. The International Energy Agency says oil demand will probably hit 86.5 million barrels a day this year. That is equal to a thousand barrels a second. The growth in demand isn’t in the U.S. — we’re using oil at 2005 levels. Instead, it’s the growth in China, India and other emerging markets that is driving global demand now.

Meanwhile, on the supply side, new oil discoveries peaked decades ago. Starting in 2011, we’ll see a drop of just over 4 million barrels per day from the fields that are currently producing about 85 million barrels a day. After 2014, world production will go into steeper and steeper decline.

4. The Road to Famine
World food demand is projected to increase 100% by 2050 due to a rapidly expanding population in countries such as China and India and yet, 963 million people, 14% of the world’s population, are already chronically hungry. Do you think you’re immune? The food on your dinner table travels an average 1,500 miles to get to your plate. Think again!

Stand Up and Fight Back
I could go on, but a whole list of all the problems facing us can seem overwhelming, and it’s probably too early for you to start drinking. I don’t think these problems will hit next week, but they are growing, and time is a luxury we cannot afford to waste. Here’s the good news: you don’t have to sit there like a lump and wait for bad news to smack you in the face. You can stand up and fight back! When it comes to finances you should be using these good times to get ready – and if you don’t think these are the good times, brother, you don’t want to know about the potential bad times!

4 Ideas to Beat The Crises and Protect Your Portfolio:

1. Move Your Money
Do you trust the big banks? I sure don’t… Their bad behavior was never punished, which increases the odds that the big banks are going to mess up big-time again. Do you think that Wall Street banks will get another bailout? I think that’s unlikely — the American people are downright furious! [As such] I don’t want my money in their banks when the manure hits the fan AGAIN… [and have] moved [my] money from a large, global bank to a couple of smaller, local credit unions and community banks. Community banks are typically more conservative about how they manage their money. I certainly don’t have to worry about them using my taxpayer dollars to hand out billion-dollar bonuses.

Bankrate.com [will tell] which banks in [your] area are the most financially secure… and you can google “Move Your Money” for more information on this movement. It’s not just individuals who are doing this. Cities as big as New York and Los Angeles are fed up and considering moving their money to local community banks as well.

2. Buy Gold While It’s Still Cheap
…if you think gold is pricey now … just you wait! I prefer to own physical gold for the long term, but you can always buy the SPDR Gold Trust (GLD) or ETFS Gold Trust (SGOL) if you’re just doing it for a trade.

3. Buy Gold Miners While They’re Still Cheap
You can play the coming rally with any gold ETF, but I think gold miners look cheaper right now. If you don’t like buying individual miners, consider the Market Vectors Gold Miners ETF (GDX) or one of the other funds or ETFs that holds a basket of miners.

Now, why buy gold miners if I think hard times are coming?
a) If the U.S. dollar slumps the way I think it will, stocks will probably head higher. That’s because they’re priced in dollars, so it takes more dollars to buy them.
b) In the Great Depression, when many stocks weren’t worth toilet paper, select gold miners did well. That’s because the price of gold did well, and they were real companies producing a real asset.

4. Ride The Market Megatrends
Not all things financial are headed down the tubes. The commodity supercycle is real and we’re seeing it play out as China, India and other emerging markets buy more and more metals, energy, and other commodities to feed their economic expansions. Commodities should continue to outperform going forward. While other sectors are headed down the tubes, commodities should continue to outperform going forward.

Meanwhile, America’s baby boomers are aging. They’re going to be looking for income, and with bonds paying piddly yields, they’ll probably load up on dividend-paying stocks and what are some stocks that pay some of the best dividends? Commodity stocks! Put those two trends together and you should have some stocks that will outperform the market, pay you nice dividends and potentially rack up solid price appreciation, too. You can find these stocks on your own. If you’re looking for dividends, as a rule of thumb, you want stocks that pay at least a 3% dividend. Just be careful, and be aware that when it comes to stocks that pay dividends, it can be hard to tell the turkeys from the eagles.

What am I doing? It all boils down to the Three P’s — Plan, Prepare and be Proactive. In other words, I’m trying to take an honest assessment of the problems facing the country and me personally. I’m preparing both physically and financially. (Are you?]

*http://www.uncommonwisdomdaily.com/4-tips-to-beat-the-next-crisis-8846 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. To view archives or subscribe, visit our site.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.

Get ready for the cliff-edge. Be maximum long duration of nominal government bonds in safe haven markets. This means the U.S., the UK and Germany, in that order, and perhaps others. Be long gold. Think the unthinkable – we always do, and you should ask yourself why the consensus refuses to do so, and seems perpetually on the ‘everything is ok’ side of events. If I was any more bond bullish we would explode. This is identical to 2008, including the incredible complacent (and we believe wrong) consensus. Words: 1382

So says RBS in an article* presented by The Pragmatic Capitalist (http://www.pragcap.com).. Lorimer Wilson, editor of www.munKNEE.com, presents below further edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) The article goes on to say:

RBS is sounding the alarm on risk assets with a call that markets are at risk of falling off the edge of the cliff – by as much as 60-70%! They refer to equity investors as the “worst cult in history….which has no basis in fact, or history, but yet seems universally accepted.” They believe the current downturn could very well “destroy” this “cult”. They’re not just bullish on treasuries –they are super bulls with a 2% target on 10 year yields, saying:

A Cliff-edge Just Around the Corner

Get ready for sub 2% on 10-yr USTs; sub 2% on 10-yr bunds; and 2.5% on UK 10-yr Gilts. Our long held US$2000 gold view as a trade for the breakdown of the financial system looks increasingly ok.

We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe), and for the global economy (particularly in the US/Europe). We have been wrong before, but we think the risks associated with us being wrong are low (i.e., [that] rates just stay where they are [or that] yields back up a little bit – after all we are not about to enter a new global economic upswing!). The risks associated with us being right are >10% returns in 10-yr USTs at the same time that equities/commodities will collapse far beyond what even some equity bears anticipate.

Today’s Stock Valuations Are Very Unattractive

For a counter consensus look at just how rich equities actually are if we are right about the economy, and how far they can fall. [L]ook at Robert Shiller’s 10-yr real adjusted P/E ratio on the S&P500, which uses ten year smoothed earnings. We have used this as our marker for proper (unbiased) long-term valuations for many years (it is freely available to all investors to look for themselves on his Yale website) and it sits at 20.0.

One pillar of our framework is that sometimes it is right to buy equity; sometimes it is right to sell equity. [C]all us old fashioned, but we will buy at low PEs, and sell at high PEs [s]o a PE now of 20 sits very uncomfortably right at the TOP of its range if we take out the pre-first great depression spike in 1929 and Nasdaq 2000 spike. We argued in [the] 2007/08 pre-crunch that we would buy equities again when they looked cheap, which would be at 6-8 PE on this metric. That is an equity fall of 60-70% from here. [C]all us mad with such big numbers if you desire, and say we will miss the big equity rally on a structural view – what rally? [The] S&P500 total return since 1Jan2000 is actually -8.1%! – [but] an investment in 30yr USTs has returned you +126%! [While] you do not have to see -60-70% off risk assets to be cautious here, we are just suggesting this is what the numbers say are attainable if certain circumstances prevail, using a 120 year snapshot.

The End-game Approaches

This all sounds somewhat doomsdayish, so we should update how the real economy/banking is panning out for us. It is saying that the end-game approaches [and there are 3 causes:]

1. The U.S. housing market
The trigger [will be] the U.S. housing market. The last of the U.S. fiscal easings, the first time homebuyer tax credit, [has ended and now] investors [must] get ready for [a] violent turn down. The NAHB housing index has dipped; housing starts [are down) 10% m-o-m (6.3% under consensus); building permits [are down] 5.9% m-o-m (8.4% under consensus); existing home sales [are down] 2.2% (8.2% under consensus); new home sales [are down] 32.7% m-o-m (14% under consensus); there is a surplus of 1.75m housing units built since 2006 and even with normal household creation, this will take two years to remove. [This] weak housing theme should now pollute its way into consumers and kickstart the rebuilding of the savings rate [which is] just 3.6% [having been] delayed from rebuilding by the fiscal/monetary shock and awe.

2. The European banking system
The European banking system faces problems [with] downgrades continuing in Europe… We are amazed there is not now immense market & media focus on the new letters that will bring forward the end-game and worsen it: 2a-7.

3. The SEC rule 2a-7
[The implementation of the SEC rule 2a-7 could well be what pushes us off the edge of the cliff!] It forces US money market funds – up to now the provider of USD liquidity to those who need it – to become ‘safer’. The SEC puts it thus: ‘The amendments tighten the risk-limiting conditions imposed on tax exempt money market funds by rule 2a-7… [and] are designed to reduce the likelihood that a tax exempt fund will not be able to maintain a stable net asset value.’ [source: SEC] The US$2.8trn of 2a-7 funds now have to a) own 30%, not 5%, of assets in sub 7 day liquid paper; b) weighted average maturity of fund has to fall to 60 from 90 days. We can all see the logic – the sovereign defaults from EMU have the power to hit EMU banks badly, and the USA does not want to repeat the calamitous ‘breaking the buck’ problem when in 2008 Reserve Primary Fund wrote down its Lehman assets, took its net asset value sub $1, caused a run on money funds which then forced them to sell their assets, cutting NAV for other funds, etc., i.e., contagion.

From what we can see, the USA is basically pulling up the drawbridge and retreating into its fortress, trying to protect its financial system from coming European banking problems – but the consequence is clear. Banking is about confidence. If you are reliant on markets to fund yourself and that confidence wanes, a total stop can occur immediately/within days…Once we apply 2a-7 (and the ability of U.S. money funds to ‘put’ their EMU bank assets back to the issuer EMU banks within 7 days on signs of trouble, since the U.S. money funds will from now on increasingly own 1yr securities with a 7 day put) to our economic slowdown/deflation themes, this means one thing. If there is a slowdown and sovereign trouble, the problems facing EMU banking have, through this rule, potentially become a whole lot worse. This worsens – and brings forward – the ‘cliff edge’ potential.

“Monster” Quantitative Easing is Coming

With fiscal policy off the agenda the next shock and awe will be in the form of large scale more monster QME (quantitative monetary easing) but with one massive difference – it [probably] will be focused on lowering yields, not expanding money supply. As such, do not be surprised if the next QME is about guaranteeing yields at, say, 2% 10-yr US, or lower. Even if it is a vanilla buying programme as before, expect it to focus along the curve and bring all yields down in a monster bull flattener (you cannot bring down 5s and not 30s because that just changes savings’ maturity preference, it does not deter saving)…

We are getting more bond bullish, not less.

*http://seekingalpha.com/article/212500-rbs-get-ready-for-the-cliff-edge?source=feed

- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint, in whole or in part, is granted provided full credit is given as per paragraph two above.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.

Most investors didn’t take warnings about the future of the economy and the financial marketplace – warnings that a ‘Category 6 Fiscal Storm’, a ‘Debt-Driven Meltdown’, a ‘Systemic Banking Crisis’, a ‘Financial Train Wreck’, a ‘God-Awful Fiscal Storm’, etc. was in store for the U.S. – seriously until it began. Perhaps this time around, before the other shoe drops, we should become more informed so we will be better positioned to survive and prosper regardless of what comes next. Words: 2128

In further edited excerpts from the original article* Lorimer Wilson goes on to say:

Some Predictions Do Come True
Such warnings and predictions were often derided as just negative nonsense coming from alarmists, ‘party poopers’, ‘Chicken Littles’, ‘perma-bears’, ‘doom and gloomers’ and the like rather than from the insightful economists and financial and market analysts who made them. To their collective credit they were all substantially correct in their prognoses of what we could expect to happen as exemplified by what actually did in the latter half of 2008 and early 2009. It cost many investors 50+% of their stock market investments, 25 – 35% of the value of their home or even the loss of their house itself, more than 10% their jobs and many more meaning full employment. Perhaps we should have paid more attention to what they said and as I compiled in the 6-part series back in 2006 regarding the “Ominous Warnings and Dire Predictions of World’s Financial Experts” followed up by a 4-part series entitled “Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure?”

Once again warnings and predictions are being put forth about the next crisis to befall us and this time around it behooves us to pay more attention and make sure this time that we are better positioned to survive and prosper whatever comes our way. Below is a major market forecast and investment advice based on demographic analyses of Harry S. Dent Jr. who has ‘been there, and done that’ successfully in the past and is once again forecasting what his research indicates is in store for us over the next decade. It should be ignored at our peril.

Dent, the author of ‘The Roaring 2000s’, ‘The Roaring 2000’s Investor’, ‘The Next Great Bubble Boom’ and his latest book entitled ‘The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History’ states that “The most important cycle change for your wealth, health, life, family, business, and investments is just ahead during the first and last depression you are likely to experience in your lifetime.”

Dent makes it clear that his predictions, while almost always contrary to most economists and expectations, have almost always proved to be correct because his predictions are based on the same sound and quantifiable logic insurance actuaries use with a high degree of accuracy to predict, decades in advance, when people will die. Dent says he applies the same science to predicting what things will happen in between birth and death – such as when people enter the workforce, get married, spend, are most productive, borrow, invest, retire, buy houses and so on. He believes that such a study of demographics and other key cycles allows him to determine the future based on the facts of the present and of demonstrated behavior so he can see the pig, or the pigs, going through the python.

With that understanding of the basis for his forecasting Dent provides 13 (befittingly) dire predictions of what we can expect to encounter in this decade in edited and reformatted excerpts from “The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History”, namely:

1. Dow will Rebound to 10,000 – 13,200 by end of 2009
A massive stimulus plan will bolster the economy somewhat into 2009 for a likely rebound in the Dow to between 10,000 and 13,200 [Editor's note: 10,500 actual at end of 2009].

2. Oil to Retest $147 High and Possibly Reach as High as $215+ by mid-2010 Before Declining to $40 – $60 by 2015
Oil prices will likely rise to a commodity bubble peak of between $180 and $215, possibly even more, and if not that high then, at an absolute minimum, retest its 2008 high of $147, between late 2009 and mid-2010. We should then see a major crash in oil prices, beginning in 2010, back into the $40 – $60 range, and possibly even lower, between 2012 and 2015 which will continue for years.

3. Commodities will Peak by mid-2010
Commodities in general, including gold and other precious metals despite their crisis hedge qualities in the past, will likely peak by mid-2010. It will probably be 2020 or 2023 before we see the next sustained commodity boom and bubble which should last into 2039 – 2040.

4. Dow will Fall to 3,800 – 4,500 by 2012
The next accelerated stock crash, led by emerging markets, Asian stocks, financial stocks and tech stocks – and finally by oil and commodity stocks – will likely occur between late 2009 and late 2010, when most of the damage will occur, and continue off and on into mid- to late 2012. The Dow will fall at least to 4,500 and more likely as low as 3,800 by mid-2012, the 1994 low where the stock market bubble first began.

5. Nasdaq will Fall Below 1,100, its 2002 low, by late 2010 or mid-2012 at the latest.

6. Market will Rally from 2012 until 2017
A substantial bear market rally will likely occur between around mid-2012 and early to mid-2017 and then a less severe downturn will occur from around mid-2017 into early 2020 or as late as early 2023.

7. Economy will be in a Depression by 2011
The worst of this next depression is likely to hit between mid-2010 and mid-2013, especially around early 2011.
[Editor’s Note: According to a recent research paper on “Stock-Market Crashes and Depressions” by David Barro, a professor of economics at Harvard, there is a 20% probability of a stock-market crash if the economic decline is between 10% and 25% and a 28% possibility if it is associated with a major war of the magnitude of World War 1 and World War ll. Conversely, if a minor depression occurs first we can expect a market crash to follow 69% of the time and 83% of the time if the depression is major i.e. the economic decline is in excess of 25%. As such, should our current recession escalate and culminate in a minor or major depression by 2011 it may well follow that we will indeed experience another major stock market crash in 2012 as Dent forecasts.]

8. Unemployment Could Increase to 12 – 15% by 2011
Unemployment could reach 12-15%, or possibly higher at the peak of the depression.

9. Inflation will Increase until mid- 2010 and then turn to Deflation
A rise in inflationary trends from mid-2009 into late 2009 or early mid-2010 will then reverse to an ominous deflationary trend in prices, as the economy slows and all assets deflate, as they have done after every bubble boom in history. It is not that the government will not try to inflate its way out of this next crisis by cutting interest rates and undertaking public works projects, etc. but that the massive write-off of real estate and business loans will outweigh those efforts and contract the money supply.

10. Interest Rates will Increase
The Federal Reserve will raise interest rates aggressively from mid-2009 forwards [Editor's note: this did not happen and does not look like it will happen until well into 2010 at the earliest] due to rising inflationary pressures which will contribute to the on-going crash of the stock market down to the 3,800 to 4,000 level.

11. U.S. Dollar will Decline
The U.S. dollar, which declined in early 2008 in the face of a strong stock market and which strengthened considerably during the Crash of ’08, is likely to decline again into 2010 – 2012 as the stock market declines considerably further. The dollar will then strengthen again before we see the second milder stage of the depression between mid-2017 and early 2020 or 2023.

12. Housing will Decline by 40 – 60% from October 2008 Levels
A more severe deflation cycle in housing will begin between late 2009 and mid-2010 and will likely last until somewhere between mid-2011 and 2013, and possibly as late as early 2015 in larger homes. During that period the average American house price will fall at least a further 40% and as much as a further 60% from today’s (fall of 2008) market prices.

Housing has remained essentially flat when adjusted for inflation over the last century except during the extreme bubble after 2000 and the deflation cycle of the early 1900s and 1930s. As such, the current grossly overvalued house prices of today, coupled with expected rising unemployment deflationary trends and the continued real estate slowdown due to the aging of the massive baby-boom generation, will likely make such a decline in house prices a reality.

13. Greatest Economic and Banking Crisis since the 1930s will Occur Between 2010 and 2012
Dent concludes by saying “If you thought 2008 was scary, 2010 to 2012 will be the greatest economic and banking crisis since the 1930s. You must be prepared in advance to survive this most difficult season. Do not accept the proposition that you cannot, or should not, take steps to guard against losses. As an investor, it is your money, your future, and your responsibility to protect yourself in the best way possible and there will be the greatest reward for those who do prepare during this once-in-a-lifetime ‘great sale’ in financial assets.”

How Best to Invest and Prosper during the Tumultuous Times Ahead (according to Dent)
1. Early to mid 2009:
a) Sell stocks [Editor's note: markets actually went up + 60% from low of March 6, 2009], except commodity and energy sectors.
b) Allocate between commodities and T-bills or money markets and /or safe currencies.

2. Late 2009 to mid-2010:
a) Sell commodities and commodities and energy stocks.
b) Allocate 100% to T-bills or money markets and safe currencies.

3. Mid- to late 2010:
Start to allocate to 30-year Treasury bonds only after their yield begins to spike.

4. Late 2010 to mid- 2011:
a) Allocate to 20-year corporate bonds when yields go to extremes.
b) More conservative investors should focus on AAA corporate, more aggressive investors toward BAA.
c) All investors must recognize, however, that even high-quality bonds will be in question as to their viability, given that the downturn between mid-2009 and 2012 is anticipated to be more extreme than anything we have seen since the early 1930s, mid-1970s, or early 1980s.

5. Mid-2011 to mid-2012:
Allocate to long-term municipal bonds when yields seem to be peaking (high-tax-bracket investors).

6. Mid- to late 2012:
a) Aggressive/growth investors: allocate majority into Asian stocks and lesser into U.S. multinational, technology and health care, with minor allocation in long-term corporate, Treasury, or municipal bonds.
b) Conservative investors: focus largely on 10- to 30-year Treasuries and 20-year corporate AAA bonds, with minor allocations in multinational, health-care, and Japanese stocks.

7. Late 2011 to early 2015:
Look for selected opportunities in real estate (small condos and starter homes early on; vacation and retirement homes later; trade-up homes by 2015).

8. Mid- to late 2014:
Aggressive/growth investors: allocate more to leading stock sectors such as China, India, health care, multinational, technology, and financials on a likely short-term correction between late 2013 and late 2014.

9. Early to mid-2017:
a) Sell stocks in all sectors.
b) Convert largely back into long-term bonds and, to a lesser degree, into T-bills or money markets.

[Dent goes on to provide additional advice on which assets to invest in up to 2036 which I have excluded here as our interest and focus is much more short-term given our current economic, fiscal and investment environment.]

Before you dismiss Dent’s assessment of what the future holds for us consider this: ‘The Great Depression Ahead’ was written in the fall of 2008 yet Dent projected on page 56 that:
1. many banks would:
a) fail – that has and is happening;
b) have to merge with others – that has already happened;
c) have to be bailed out by the government – that has already happened;

2. the Fed would have to cut short-term interest rates to near zero – that has already happened;

3. the federal deficit would soar to in excess of a trillion dollars – that is already a reality and

4. the 30-year Treasury bond would eventually fall to something like 2% in yields and that is developing.

Dent has a knack for telling us what we would rather not hear but it behooves us to make the most of his insights for what they are worth. Dent encourages everyone to apply for his free periodic e-mail updates to his basic forecasts and investment strategies and to check out ‘Free Downloads’ at www.hsdent.com for further and more current information.

*http://www.gold-eagle.com/editorials_08/wilsonl031809.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.

With governments having injected huge sums of money into their economies, more and more top strategists are becoming very worried about inflation. Words: 664

In further edited excerpts from the original article* John Reese (validea.com) goes on to say:

It may seem like jumping the gun, given that both Canada and the U.S. have been experiencing deflation in recent months but the threat is serious. For investors, that raises two key questions:

1. Does Inflation Mean Troubled Times for Stocks?
Many say high-inflation periods are indeed trouble for stocks. As inflation rises, governments will raise interest rates, the theory goes, and investors will flee stocks and head to Treasury bills.

The reality is much more complex. While history has shown that the stock-fleeing scenario can happen, it doesn’t always. In 1975, when U.S. inflation averaged 9.2 per cent, the S&P 500 surged about 30 per cent while 10-year U.S. Treasury bills averaged an 8-per-cent yield. In 1980, when inflation averaged 13.6 per cent – the highest annual reading of the past 60-plus years – the S&P gained almost 30 per cent, while 10-year T-bills yielded an average of 11.4 per cent throughout the year.

Over the longer term, some of history’s top strategists actually say that inflation is a big reason to buy stocks – not to avoid them. Foremost among them is Warren Buffett. His inflation research goes way back. In 1977 – just before the U.S. was about to enter into one of the worst inflationary climates in history – in a column for Fortune magazine he said, “stocks are probably still the best of all the poor alternatives in an era of inflation – at least they are if you buy in at appropriate prices.”

Why keep your long-term focus on stocks if inflation is coming? For starters, they have an overall advantage over fixed-income investments because of the equity risk premium – the notion that stocks return more than fixed income investments over the long haul because investors demand greater returns for taking on greater short-term volatility.

Just as importantly, when you factor in inflation, that advantage becomes even greater. When inflation hits, stocks can draw on increasing earnings streams as companies raise prices and increase profits to keep up with inflation. Most bonds and bills can’t do that and when inflation is factored in, the equity risk premium becomes crucial. Fixed-income investments, because their nominal yields are usually lower than nominal stock returns to begin with, have a much bigger percentage of returns eaten away by inflation.

In his book “Contrarian Investment Strategies” , David Dreman noted that from 1946 to 1996, compound returns after inflation for stocks were better than those of bonds 84 per cent of the time if your holding period was five years. Stocks also outperformed T-bills in 82 per cent of those five-year periods. Using 10-year periods, stocks beat bonds 94 per cent of the time and T-bills 86 per cent of the time. When you look at 20-year holding periods, stocks beat both bonds and T-bills 100 per cent of the time.

2. How Can You Position Your Portfolio to Deal With an Inflationary Climate?
If you knew, if and when, major inflation was going to set in and how long it would last, you might – and, I stress, might –be able to make some short-term profits by jumping back and forth between stocks and fixed-income investments but no one knows those factors in advance, which is why I’m sticking with stocks.

My Buffett-based approach targets stocks that have boosted earnings per share in at least nine of the past 10 years, have 10-year average returns on equity of at least 15 per cent and have positive free cash flows, all of which align with Mr. Buffett’s inflation-protection advice. My model is quite stringent, and currently gives 100 per cent scores to less than a dozen stocks in the market.

*http://m.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/ask-buffett-if-inflation-comes-stocks-are-best-bet/article1279016/?service=mobile

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

We start our journey with a review of articles recently published in Project Syndicate by two economists I respect, Nouriel Roubini and Harvard’s Martin Feldstein. Each weighed in on the topic of gold as an investment in articles. These two fine economists address the question, “Should I buy gold at a historically high price?” Feldstein approaches the question from a long-term perspective while Roubini focuses his analysis on the recent past, since 2008. Readers asked for my opinion on these articles. Parts I and II are my response. www.iTulip.com; By: Eric Janszen; Words: 401

Editor’s Note:
Part I: “Is Gold a Good Hedge?” does not warrant being edited by me and as such I provide a link to the article posted on Janszen’s own site as follows: http://www.itulip.com/forums/showthread.php?p=141535#post141535
Part II: “The Gold Bubble and the Gold Bugs” has yet to be posted. Wait for it here or subscribe to itulip.com (it’s free).
Part III: Will the year 2010 be the first in a decade that is worse for gold than for stocks? Again, wait for it here or subscribe to itulip.com

Part III pours over ten years of stock and gold market data to answer the questions:
1. Whether our gold investments are down 10% or up more than 300%, should we buy more, hold, or sell?
2. What’s in store for 2010?
3. Might the year 2010 be the first since the year 2000 that gold finishes the year below its opening price?
4. What might that mean for stock and bond prices?

Taken together, the review of Feldstein’s and Roubini’s articles, and our review of the past ten years of stocks versus gold, draws us to the inescapable conclusion that:
- for the decade that began in the year 2000 the gold bug hypothesis was the right one: stocks, bonds, and real estate did, net of asset price inflation and deflation, performed worse and with higher volatility than the barbarous relic.

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.