munKNEE.com » Wall Street

Twitter Weekly Updates for w/e May 6/2011

Editor — Fri, 06 May 2011 07:28:00 +0000

New article posted on munKNEE:
http://www.munknee.com/2011/05/richard-russell-demise-of-the-yankee-dollar-vs-the-rise-in-gold/ #
New article by Chris Puplava:
http://www.munknee.com/2011/05/what-the-1970s-performance-of-gold-silver-and-usd-says-about-tomorrow/ #
New article!
http://www.munknee.com/2011/05/why-hyperinflation-is-not-likely-let-alone-imminent/ #
New Article on Gold and Silver
http://www.munknee.com/2011/05/%e2%80%9cthree-peaks%e2%80%9d-pattern-suggests-gold-to-decline-17-into-june/ #
Not too late to buy gold!http://www.munknee.com/2011/04/goldrunner-gold-on-track-to-reach-1860-1920-by-mid-year/ #
An opposite point of view:http://www.munknee.com/2011/05/america-is-bankrupt-claim-is-total-nonsense-heres-why/ #

The ‘Money Industry’ Owns the American Political System

Editor — Fri, 12 Mar 2010 14:56:02 +0000

The ‘Money Industry’ bought control of America and, as such, bought control of the American political system and, in the process, betrayed America’s trust in them. They are still in control and there is no end in sight. Words: 1611

In further edited excerpts from the original article* by Harvey Rosenfield (www.wallstreetwatch.org), President of the Consumer Education Foundation, he goes on to say:

Banking with Credit Card

Over the last decade, Wall Street showered Washington with over $1.738 billion in supposed ‘campaign contributions’ and another $3.441 billion on 2,996 officially registered lobbyists whose job it was to press for deregulation. In return for the investment of this $5.179 billion, the Money Industry was able to get rid of many of the reforms enacted after the Great Depression and to operate, for most of the last ten years, without any effective rules or restraints whatsoever.

The Transfer of Power Took 25 Years

• Beginning in 1983 with the Reagan Administration, the U.S. government acquiesced to accounting rules adopted by the financial industry that allowed banks and other corporations to take money-losing assets off their balance sheets in order to hide them from investors and the public.

• Between 1998 and 2000, Congress and the Clinton Administration repeatedly blocked efforts to regulate “financial derivatives” — including the mortgage-related credit default swaps that became the basis of trillions of dollars in speculation.

• In 1999, Congress repealed the Depression-era law that barred banks from offering investment and insurance services, and vice versa, enabling these firms to engage in speculation by investing money from checking and savings accounts into financial “derivatives” and other schemes understood by only a handful of individuals.

• Taking advantage of historically low interest rates in the first few years of this decade, mortgage brokers and bankers began offering mortgages on egregious terms to purchasers who were not qualified. When these predatory lending practices were brought to the attention of federal agencies, they refused to take serious action.

Worse, when states stepped into the vacuum by passing laws requiring protections against dirty loans, the Bush Administration went to court to invalidate those reforms, on the ground that the inaction of federal agencies superseded state laws.

• The financial industry’s friends in Congress made sure that those who speculate in mortgages would not be legally liable for fraud or other illegalities that occurred when the mortgage was made.

• Egged on by Wall Street, two government-sponsored corporations, Fannie Mae and Freddie Mac, started buying large numbers of subprime loans from private banks as well as packages of mortgages known as “mortgage-backed securities.”

• In 2004, the Securities and Exchange Commission, now operating under the radical deregulatory ideology of the Bush Administration, authorized investment banks to decide for themselves how much money they were required to set aside as rainy day reserves. Some firms then entered into $40 worth of speculative trading for every $1 they held.

• With the compensation of CEOs increasingly tied to the value of the firm’s total assets, a tidal wave of mergers and acquisitions in the financial world — 11,500 between 1980 and 2005 — led to the predominance of just a relative handful of banks in the U.S. financial system. Successive administrations failed to enforce antitrust laws to block these mergers. The result: less competition, higher fees and charges for consumers, and a financial system vulnerable to collapse if any single one of the banks ran into trouble.

• Investors and even government authorities relied on private “credit rating” firms to review corporate balance sheets and proposed investments and report to potential investors about their quality and safety.

But the credit rating companies had a grave conflict of interest: they are paid by the financial firms to issue the ratings. Not surprisingly, they gave the highest ratings to the investments issued by the firms that paid them, even as it became clear that the ratings were inflated and the companies were in precarious condition. The financial lobby made sure that regulation of the credit ratings firms would not solve these problems.

None of these milestones on the road to economic ruin were kept secret. The dangers posed by unregulated, greed-driven financial speculation were readily apparent to any astute observer of the financial system but few of those entrusted with the responsibility to police the marketplace were willing to do so and those officials in government who dared to propose stronger protections for investors and consumers consistently met with hostility and defeat. The power of the Money Industry overcame all opposition, on a bipartisan basis.

Derivatives Were Their Weapons of Mass Destruction

As Franklin Roosevelt observed seventy years ago, “our enemies of today are the forces of privilege and greed within our own borders” and today their weapons of mass destruction were derivatives: pieces of paper that were backed by other pieces of paper that were backed by packages of mortgages, student loans and credit card debt, the complexity and value of which only a few understood.

America’s economic system is where it is today because gambling became the financial sector’s principal preoccupation. The pile of chips grew so big that the Money Industry displaced real businesses that provided real goods, services and jobs.

The Purchase of America was a LBO

The American consumers are not to blame for this debacle nor those who used credit in an attempt to have a decent quality of life, nor those who agreed to accept the amazing terms for mortgages and finding out later that they had been misled and could not afford the loan at the real interest rate buried in the fine print. Instead of assuming any responsibility for living beyond their means Americans are only to blame for allowing Wall Street to do what it calls a leveraged buy out of our political system by spending a relatively small amount of capital in the Capitol in order to seize control of our economy.

The Privileges of the Financial Oligarchy are Being Preserved

The moment the Money Industry realized that the casino had closed, it turned — as it always does — to Washington, this time for the mother of all favors: a $700 billion bailout which was quickly extended to include a feast of discount loans, loan guarantees and other taxpayer subsidies to the tune of at least $8 trillion so far. Then, panicked by Wall Street’s threat to pull the plug on credit, Congress rebuffed efforts to include safeguards on how taxpayer money would be spent and accounted for.

The bankers used the bailout monies to pay bonuses, to buy back their own bank stock, or to build their empires by purchasing other banks with very little of the money being used for the purpose it was ostensibly given: to make loans.

Washington’s latest giveaway — the Greatest Wall Street Giveaway of all time — has not fixed the economy but that, at this very moment of national threat, the banks, hedge funds and other parasite firms that crippled our economy are pouring money into Washington to preserve their privileges at the expense of the rest of us.

Washington Was Paid Off

That’s why you won’t hear anyone in the Washington establishment suggest that Americans be given a seat on the Board of Directors of every company that receives bailout money or that credit default swaps and other derivatives should be prohibited, or limited just like slot machines, roulette wheels and other forms of gambling.

In most of the United States you can go to jail for stealing a loaf of bread but if you have paid off Washington, you can steal the life-savings, livelihoods, homes and dreams of an entire nation, and you will be allowed to live in the fancy homes you own, drive multiple cars, throw multi-million dollar birthday parties, etc. and virtually get away with it.

Sure, you might not be able to get your bonus this year or, worst come to worst, if you are one of the very unlucky few unable to take advantage of the loopholes in the plan announced by the Treasury Secretary Geithner, you may end up having to live off your past riches because you can only earn a measly $500,000.

The Money Industry Remains in Charge

Since President Obama’s key appointments to the Treasury, the SEC and other agencies, like their predecessors, are veterans of the Money Industry the Money Industry remains in charge of the federal agencies and keeps our elected officials in its deep pockets and, as such, nothing will change and that if America is to recover from this economic debacle that we find ourselves in, its people must return to the principles that made it great — hard work, creativity, and innovation — and both government and business must serve that end. Washington must serve America, not Wall Street. Things will not change so long as Americans acquiesce to business as usual in Washington. It’s time for Americans to make their voices heard.

Wall Street is presently humbled, but not prostrate. Despite siphoning trillions of dollars from the public purse, Wall Street executives continue to warn about the perils of restricting “financial innovation” even though it was these very innovations that led to the crisis in the first place.

With Wall Street having destroyed the system that enriched its high flyers, and plunged the global economy into deep recession, it’s time for Congress to tell Wall Street that its political investments have also gone bad. This time, legislating must be to control Wall Street, not further Wall Street’s control.

*http://www.wallstreetwatch.org/reports/introduction.pdf

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.
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Now is the Time to Prepare for Coming Inflation

Editor — Tue, 02 Mar 2010 04:40:03 +0000

The bond market is signaling that rising prices are just ahead and you should be worried. Don’t be deluded into thinking that inflation “might be coming” in the future and that once you see the signs you can protect yourself. If you wait too long to take precautions, this silent thief will most certainly steal your wealth and savings. Take the right actions today, and you can not only insure your wealth against erosion by inflation… you can generate life-changing profits as well. Words: 853

In further edited excerpts from the original article* Jon Herring (www.investorsdailyedge.com) goes on to say:

First, it is important to have a proper understanding of inflation. Most people believe that the definition of inflation is rising prices. This is not true. The definition of inflation is when the supply of new money outpaces the production of goods and services. When an increasing supply of money chases a decreasing or static supply of goods and services, the money becomes worth less (or worthless, if you prefer) and the price of goods and services goes up.

In other words, rising prices are a symptom of inflation. They are the end result of a monetary phenomenon but if you wait until the symptoms appear, it will already be too late. If you own a house on the Gulf of Mexico, you wouldn’t start pricing hurricane insurance with a Category 4 storm curling around the Florida Keys. Likewise, the time to shop for inflation insurance is not when prices have already begun to rise and here are some early indicators:

1. The bond market is signaling that rising prices are just ahead and you should be worried. The credit markets are much larger than the stock markets. These markets are driven by traders whose job it is to see beyond the lies and propaganda coming from Washington and Wall Street. You will not have to wait for asset deflation to finally give way to inflation. The bond market will spot it on the horizon and begin discounting bonds and raising long term rates. When Uncle Sam’s creditors begin to worry about inflation, they demand a higher rate of interest for their loans. As interest rates tick up, bond prices fall and the prices of long-term U.S. Treasury bonds are falling at a record clip.

2. Another indication that the first winds of inflation will soon arrive is that gold stocks have broken out to highs not seen since 2008. The market is speaking loud and clear. It is time to batten down the hatches.

There are a number of ways to profit and protect your wealth during a period of inflation. If you are knowledgeable and prepared, it can make you a fortune.

1. you should have a healthy portion of your portfolio in precious metals and energy investments.

2. consider shorting long-term government bonds. As interest rates inevitably rise, bond prices fall. Shorting the TLT would make an excellent long term inflation hedge. You could also consider buying TBT, a leveraged inverse fund which seeks to return two times the return of the TLT. In other words, if the TLT falls by 10%, the TBT should rise 20%.

3. blue chip companies with strong business fundamentals and a long history of raising dividends are also an excellent way to profit in an inflationary environment. These companies can raise their prices to keep up with inflation, and then pass the profits along to shareholders and the consistently rising dividends can produce a yield that outpaces all but the most severe inflation.

4. hold sensible levels of long-term fixed rate debt on valuable assets (a mortgage, for example). By “sensible”, I mean debt that can be easily serviced, even in a worst case scenario. Fixed rate debt can be a powerful financial tool in an inflationary environment. How else could you legally borrow a dollar and pay back 50 cents? If you use that debt wisely to purchase assets that increase in value over the term of the loan, your profits can be substantial.

Don’t be afraid of inflation. It is already here and there is nothing we can do about it. The effects will soon be obvious to all. Just make sure you are among those who are protected and prepared to profit.

*http://www.investorsdailyedge.com/inflation-is-not-coming-it-has-arrived.html#more-4413 (Investor’s Daily Edge offers a free daily investment newsletter in which you’ll receive practical strategies for protecting your portfolio and multiplying your money. You’ll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor’s Daily Edge.)

How Safe Is Your Retirement Money from the Government’s Grasp?

Editor — Sat, 27 Feb 2010 02:01:57 +0000

Hank Paulson, the Goldman Sachs bankster/US Treasury Secretary, who deregulated the financial system, caused a world crisis that wrecked the world financial system is writing in the New York Times urging that the mess he caused be fixed by taking away from working Americans the Social Security and Medicare for which they have paid in earmarked taxes all their working lives. Wall Street’s approach to the poor has always been to drive them deeper into the ground. Words: 777

In further edited excerpts from the original article* Michael Myers (www.retirementcrisisinvesting.com) goes on to say:

As there is no money to be made from the poor, Wall Street fleeces them by yanking away their entitlements. It has always been thus. During the Reagan administration, Wall Street decided to boost the values of its bond and stock portfolios by using Social Security revenues to lower budget deficits. Wall Street figured that lower deficits would mean lower interest rates and higher bond and stock prices.

Two Wall Street henchmen, Alan Greenspan and David Stockman, set up the Social Security raid in this way: the Carter administration had put Social Security in the black for the foreseeable future by establishing a schedule for future Social Security payroll tax increases. Greenspan and Stockman conspired to phase in the payroll tax increases earlier than was needed in order to gain surplus Social Security revenues that could be used to finance other government spending, thus reducing the budget deficit. They sold it to President Reagan as “putting Social Security on a sound basis.”

Along the way Americans were told that the surplus revenues were going into a special Social Security trust fund at the U.S. Treasury but what is in the fund is Treasury IOUs for the spent revenues. When the “trust funds” are needed to pay Social Security benefits, the Treasury will have to sell more debt in order to redeem the IOUs.

Social Security was mugged again during the Clinton administration when the Boskin Commission jimmied the Consumer Price Index in order to reduce the inflation adjustments that Social Security recipients receive, thus diverting money from Social Security retirees to other uses.

We constantly hear from Wall Street gangsters and from Republicans and an occasional Democrat that Social Security and Medicare are an “unfunded liability” – a form of welfare that we can’t afford. This is a lie. Social Security is funded with an earmarked tax. People pay for Social Security and Medicare all their working lives. It is a pay-as-you-go system in which the taxes paid by those working fund those who are retired.

Currently these systems are not in deficit. The problem is that government is using earmarked revenues for other purposes. Indeed, since the 1980s Social Security revenues have been used to fund general government. Today Social Security revenues are being used to fund trillion dollar bailouts for Wall Street and to fund the Bush/Obama wars.

Having diverted Social Security revenues to war and Wall Street, Paulson says there is no alternative but to take the promised benefits away from those who have paid for them.

Years ago with stagflation defeated and a rising stock market, I favored privatizing Social Security as a way of creating a funded retirement system and producing greater savings and larger incomes for retirees. At that time Wall Street was interested, not for my reasons, but in order to collect the fees from managing the funds.

Had Social Security been privatized, I doubt that Wall Street would have been permitted to deregulate the financial system. Too much would have been at stake.

After the latest crisis brought on by Wall Street’s dishonesty and greed, trusting Wall Street to manage anyone’s old age pension requires a leap of faith that no intelligent person can make.

Wall Street has got away with its raid on the public treasury. Now, pockets full, it wants to pay for the heist by curtailing Social Security and Medicare. Having deprived the working population of homes, jobs, and health care, Wall Street is now after the elderly’s old age security.

Social Security, formerly an untouchable “third rail of politics,” is now “unsustainable,” while the real unsustainables–a pre-1929 unregulated financial system and open-ended multi-trillion dollar global war against terror are the new untouchables.

This transformation signals the complete capture of American democracy by an oligarchy of special interests.

*http://retirementcrisisinvesting.com/financial-crisis/is-your-retirement-money-safe#more-353

Sovereign Debt Defaults Now Possible/Likely?

Editor — Tue, 23 Feb 2010 01:04:05 +0000

Governments the world over have spent the past year bailing out, backstopping, insuring, and stimulating their financial sectors and economies throwing around trillions of dollars, euros, yen, and pounds like Halloween candy. Officials have assured us there’s little risk to that strategy but I believe that the opposite is true – that if you borrow and spend too much, all you’re going to do is transform a Wall Street debt crisis into a Washington debt crisis. Words: 882

In further edited excerpts from the original article* Mike Larson (www.moneyandmarkets.com) goes on to say:

Lo and behold, the bill for all this global fiscal and monetary largesse is beginning to come due. Debt and deficit problems are going from bad to worse in many nations. That’s raising the very real risk of the unthinkable: widespread SOVEREIGN debt defaults!

Dubai
The first shot across the bow came when the tiny emirate of Dubai dropped a bombshell on the markets. A government-backed holding company, Dubai World, warned that it needed to restructure $26 billion in debts – all $26B – tied to its property development arm Nakheel PJSC and other subsidiaries.

Am I surprised? Not in the least. The Dubai debt crisis was a long time coming but the troubling thing is that Dubai is NOT alone.

Greece
Greece is part of the European Union, and it’s rapidly sliding down the slope toward default. Its budget deficit has exploded to 12.7 percent of GDP, the worst in the 27 EU countries, while its outstanding public debt load is on track to hit 125 percent of GDP in 2010.

In order to avoid stiff EU sanctions and penalties, Greece is slashing its operations budget by 10 percent. The government is also planning a 2010 hiring lockdown and a partial public salary freeze. Greece’s Finance Minister George Papaconstantinou says there is “absolutely” no default risk but those measures don’t appear to be comforting investors.

The Athens Stock Exchange General Index has plunged. Meanwhile, Greece’s two-year government debt has dropped in price by the most in 11 years. Fitch has already cut Greece’s sovereign debt rating to “BBB+.” That’s the third-lowest investment grade rating. Standard & Poor’s rates Greece “A-,” but that rating may be lowered soon.

Bottom line: We’re facing the very real possibility of a significant sovereign debt default or bailout in Europe.

Spain
At times like these, investors naturally ask themselves where the next domino might fall. My answer: How about Spain? S&P has lowered its credit outlook for that country to negative from stable. The ratings agency cited “pronounced deterioration” in the country’s public finances.

Spain is in trouble because it experienced its own gigantic housing bubble, one that has long-since popped. Unemployment is on track to top 20 percent in 2010, while the nation’s deficit is swelling toward 11 percent of GDP. The economy has shrunk for six straight quarters, prompting the government to spend billions of dollars to stimulate growth.

The U.K.
Then there’s the U.K. Its budget deficit is running at 12 percent of GDP, the highest in the Group of 20 community of nations. That’s forcing the government to impose a 50 percent tax on banker bonuses, and to boost income taxes. Despite those moves, the U.K. Treasury is still going to have to borrow billions more pounds than it originally planned to fund its deficit.

The U.S.
What about us? The fiscal 2009 budget deficit here soared to $1.4 trillion, the worst ever. That was equal to 9.9 percent of the overall economy — almost triple the level of a few years ago and the highest in the nation’s history, excluding years where deficits were bloated by massive war spending (à la World War II). Over the next decade, the Congressional Budget Office projects an additional $7.2 trillion-plus in red ink.

We are now borrowing record amounts of money, week in and week out, to underwrite our profligacy. Our debt load is rising so fast, Congress has had to raise the so-called debt “ceiling” yet again. Everyone knows the cap is a joke. Every time we come close to tagging it, lawmakers just raise it again but the frequency and size of those increases is getting totally out of control.

Nobody expects the U.K. or U.S. to lose their AAA debt ratings anytime soon but Moody’s has warned in a report that both countries’ ratings are at more risk than those in other triple-A rated countries like Germany and France and I don’t see any credible plan coming out of Washington to get our disastrous budget situation under control.

Given this environment, my advice for investors is simple: avoid investing in regions where sovereign credit risk is rising. Focus instead on countries where government debt and deficits are NOT a major threat such as China, Brazil, and Australia who are generally sitting on massive reserves, seeing healthy growth, and otherwise prospering.

You may also want to think about lightening up your risk a little bit.

*http://www.moneyandmarkets.com/sovereign-debt-defaults-the-next-shoe-to-drop-2-36832 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

Wein: 10 Events That Will Impact the U.S.A. This Year

Editor — Wed, 17 Feb 2010 03:36:14 +0000

Dead on target at the beginning of the new year, 76-year-old Byron Wien again published his annual list of surprises to expect in 2010. Wien, Vice Chairman of Blackstone Advisory Services and one of Wall Street’s best known veterans, has been publishing his list of economic, market and political surprises since 1986. Words: 664

In further edited excerpts from the original article* Prieur du Plessis (www.investmentpostcards.com) outlines Wien’s list as follows:

1. Economy Grows; Unemployment Declines
The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80.

2. Interest Rates Rise
The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end.

3. Yields Increase
Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries.

4. S&P 500 Goes Up Then Down
In a roller coaster year the Standard and Poor 500 rallies to 1,300 in the first half and then runs out of steam and declines to 1,000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors.

5. US Dollar Rallies Against Yen and Euro
Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain.

6. Japan Out-Performs
Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000.

7. Nuclear Power Promoted
Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020.

8. The Democrats Lose 20 Seats
The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected.

9. Weak Financial Service Legislation Passed
When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market.

10. Iran and Pakistan Become Hot Spots
- Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat.
- Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal.

*http://www.investmentpostcards.com/2010/01/05/

David Rosenberg: It’s Time to Implement Defensive Strategies

Editor — Thu, 21 Jan 2010 23:02:21 +0000

To protect your portfolio in this deflationary landscape, a pervasive focus on capital preservation and income orientation, whether that be in bonds, hybrids, or a focus on consistent dividend growth and dividend yield would seem to be in order. Words: 1380

In further edited excerpts from the original article* David Rosenberg (www.GluskinSheff.com) goes on to say:

CONSENSUS OPINION FOR 2010
After perusing several Wall Street research documents on what to expect for 2010 I found, however, that the overwhelming consensus view was as follows:

• Muted recovery but still GROWTH

• Equity markets will be UP

• Most popular forecast involves a large-cap multi-national/emerging market barbell for equity allocation

• Decided preference for emerging markets as that is where the growth is going to come from

• This adds up to expectation of 4% to 5% for global GDP growth; 2% to 3% for the U.S.A.

• Generally neutral on the U.S. dollar

• Positive on commodities

• Negative on long government bonds across the board because of concern over government balance sheets

• Overall constructive view on credit product, especially for shorter-term maturities

MY THOUGHTS ON THE OUTLOOK

The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010.

This recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit whereas now we are in a prolonged period of credit contraction, especially as it relates to households and small businesses.

In addition, we have characterized the rally in the economy and global equity markets appropriately as a bear market rally from the March 2009 lows, influenced by the heavy hand of government intervention and stimulus.

2010 may well be seen as the year in which we witness the inevitable drawn out decline that is typical of secular bear markets.

The defining characteristic of this asset deflation and credit contraction has been the implosion of the largest balance sheet in the world — the U.S. household sector. Household net worth has contracted nearly 20% over the past year-and-a-half, a degree of trauma we have never seen before.

Frugality is the new fashion and will likely stay that way for years as attitudes toward discretionary spending, home ownership and credit undergo a secular shift. As households begin to assess the shock and what it means for their retirement needs, the impact of this shocking loss of wealth on consumer spending patterns in the future is likely going to be very significant.

What has really impressed me is what the general public has been doing with their savings, which is to allocate more towards fixed-income strategies. Looking at the U.S. household balance sheet, what I see on the asset side is a 25% weighting towards equities, a 30% weighting towards real estate and there is obviously a lot in cash and deposits, life insurance reserves and consumer durables, but the weighting in fixed-income securities is less than 7%. So my contention is that this is the part of the asset mix that will expand the most in the next five to 10 years.

What also makes this cycle entirely different from all the other ones experienced in the post-WWII era is that this is the first consumer recession we have witnessed where the median age of the baby boom population is 52 going on 53. The last time we had a consumer recession in the early 1990s, the boomer population was in their early 30s and they were still expanding their balance sheets. The last time we had a bubble burst in 2001 they were in their early 40s. Now they are in their early 50s, the first of the boomers are in their early 60s, and we are talking about a critical mass of 78 million people who have driven everything in the economy and capital markets over the last five decades. This cohort realize that they may never fully recoup their lost net worth, and yet they will probably live another 20 or 30 years.

So, what is happening, which is at the same time fascinating and disturbing, is that the only part of the population actually seeing any job growth in this recession are people over the age of 55. Everyone else can’t get a job or are losing jobs — there is a youth unemployment crisis in the United States of epic proportions and a record number of Americans have been out of work for longer than six months in part because the “aging but not aged” crowd is not retiring as early as they used to.

Many retirees who took themselves out of the workforce because they believed that their net worth would provide for them sufficiently in their golden years are redoing their calculations and coming back to the workforce to make up for their lost wealth. They are seeking income in the labour market, not because they want to but because they have to in order to satisfy their retirement lifestyles.

We can understand that there are concerns over inflation, but the history of post-bubble credit collapses is that even with massive policy reflation, deflation pressures can dominate for years — this was certainly the case in the U.S.A. and Canada in the 1930s, and again in Japan from the 1990s until today. Income strategies in both cases worked well with minimal volatility.

Of course, all the talk right now is about reflation and all the efforts from the central banks to create inflation, but the facts on the ground show that the inflation rate for both consumers and producers has turned negative for the first time in six decades. Perhaps inflation is a consensus forecast but deflation is the present day reality and often lingers for years following a busted asset and credit bubble of the magnitude we have endured over the past two years.

So, to protect the portfolio in this deflationary landscape, a pervasive focus on capital preservation and income orientation, whether that be in bonds, hybrids, or a focus on consistent dividend growth and dividend yield would seem to be in order.

What has become crystal clear is that the U.S. government has taken over the beleaguered U.S. dollar, which can only be described as benign neglect.

2010 is a mid-term election year in the U.S. and the Administration will do everything it can to squeeze every last possible basis point out of GDP growth and to prevent the unemployment rate, the most emotionally-charged statistic of them all, from reaching new highs.

While I still believe that a sustainable return to inflation is a long ways away, there is little doubt that we will see continuous efforts at policy reflation, which means that the U.S. money supply is going to continue to expand rapidly, which in turn is positive for commodities, which are after all priced in U.S. dollars.

On top of all that, it does appear from a volume demand perspective, that the secular growth dynamics in Asia, China and India in particular, have reasserted themselves and this part of the world is the marginal buyer of commodities. This is the key reason why the Canadian stock market, given its resource exposure, has continued to do very well in comparison to the United States, especially when the positive trend in the Canadian dollar enters the equation, and I expect this outperformance to continue.

One conclusion I think we can agree on is the need to maintain defensive strategies and minimize volatility and downside risks as well as to focus on where the secular fundamentals are positive such as in fixed-income and in equity sectors that lever off the commodity sector, under the proviso that the “experts” are correct on this particular forecast — that China and India remain the global growth leaders.

*http://www.godlikeproductions.com/forum1/message940992/pg1