May Finance in Focus

Posted on 27th April 2010 by Trevor in Finance in Focus

With Complacency Comes Danger 

It is a measure of the powerful positive sentiment currently driving the market that each successive concern is readily dismissed. Dubai World debt problems? They are rich, they can cover it. Greek debt? It is a small country, someone will bail them out. Breakdown of the Euro zone? It will probably be better to lose a few countries anyway. China property bubble? The authorities can contain it. And Goldman Sachs malfeasance? Well, that is probably the least surprising and least concerning of the lot, assuming you do not own GS stock! 

But all these issues have one thing in common. They are the result of excessive debt and leverage. Debt is useful and productive up until a point. As long as the underlying asset generates enough cash flow to service and gradually pay down the debt, all is well. But when the underlying asset suffers a decline in cash flow, the party is over. Debt servicing becomes harder and default eventually occurs. 

Governments around the world realize this and they have (so far) offset the effect of contracting private credit by running huge budget deficits. Ironically enough, equity markets are the main beneficiary of the increase in government debt so it is no surprise that investors are showing no signs of concern. The International Monetary Fund (IMF) is not so sanguine though. In it’s just released Global Financial Stability Report the IMF asks, could Sovereign Risks Extend the Global Credit Crisis’. 

“The crisis has increased sovereign risks and exposed underlying vulnerabilities. The higher budget deficits resulting from the crisis have pushed up sovereign indebtedness, while lower potential growth has worsened debt dynamics. For example, G-7 sovereign debt levels as a proportion of GDP are nearing 60-year highs. Higher debt levels have the potential for spillovers across financial systems, and to impact on financial stability.” 

The chart below shows G7 sovereign debt levels as a proportion of GDP. Note the spike higher from 2007/08. Now, many will look at this chart and say so what, we have been here before. While that is certainly the case, there is one crucial difference. In the 1950s and 1960s debt levels were falling from the excessive levels built up during the aftermath of the depression and the Second World War. On the plus side, private debt levels were tiny and as nations recovered from the Depression and war, increased credit flowed to the private sector. 

More to the point, most of the increased credit was used for productive purposes. Banks hadn’t invented mortgage equity withdrawals or subprime loans yet, so loans tended to be for production rather than consumption. It is not surprising therefore that the US golden period was during the 50s and 60s. 

But the global economy is now in a position of high government AND high private sector indebtedness. Because governments are quite good at spending other people’s money, we expect the sovereign debt ratio to go much higher in the years ahead as an offset to contracting private sector credit. But like other concerns before it, equity markets around the world just don’t seem all that worried by 50 year high government debt levels. Nor does the bond market for that matter. In our experience, investors don’t care about such trivial things as housing bubbles, sovereign debt defaults, or currency breakdowns until they have to.   Source: Sound Money. Sound Investments.com

We strongly believe caution is warranted.

Are we in Deflation or Inflation?  

 The Bond Markets tell us Inflation is dead there are numerous articles telling us so, even Ben Bernanke!  It must be true!

 So what should you do – conventional wisdom says this:

Investment Themes For Deflation

  • In deflation, debt is the enemy.
  • Risk is to be avoided.
  • Cash is raised.
  • Treasuries are sought out as a safe haven
  • CD ladders offer a good investment structure.
  • Gold, acting as money does well.
  • Select equity shorts or Puts are a standout.
  • Renting as opposed to owning a house should be considered.
  • Currency plays.

 Investment Themes For inflation

In inflation the last place one wants to be is in cash.

  • Commodities in general are a standout.
  • Gold is a standout.
  • Precious metals are a standout.
  • Property is a winner.
  • Equities are a winner.
  • Treasuries are distinct losers if not outright shorts.
  • Foreign currencies
  • Energy a winner

Looking at the above two scenarios we have bits of each doing well.

Deflation in economics is a persistent decrease in the general price level of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money – a negative inflation rate. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation.

Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically.

Disinflation is a decrease in the rate of inflation. This phase of the business cycle, in which retailers can no longer pass on higher prices to their customers, often occurs during a recession. In contrast, deflation occurs when prices are actually dropping.

To fully understand disinflation we need to first understand inflation. The word inflation originally meant an increase in the supply of money which resulted in an increase in prices. But, in more recent years, the word inflation has come to mean the result rather than the cause. i.e. an increase in prices rather than an increase in the supply of money. This might be partially the result of the wide spread usage of the term “inflation rate” which measures the rate of price increases rather than the increase in the money supply.

Disinflation on the other hand is a more recent term and so only has the connotation of moderating prices i.e. prices that are not increasing as quickly as they once did. For example if the annual inflation rate one month is 5% and it is 4% the following month, prices disinflated by 1% but are still increasing at a 4% annual rate.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008.  But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong.  When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand.  If money didn’t drive it, then it isn’t deflation.

Since the commodities slide started in July 2008, annual MZM growth on a weekly basis has averaged 11.6%.  It never shrunk!  If the broad US money supply always grew by at least 9% over the period of these sharply lower prices the deflationists cite, and averaged 12% to 13%, then how on earth could the stock slide or commodities slide be deflationary?  Prices didn’t fall because there was less money available to spend on stocks and commodities, but because demand plunged relative to supply.

Deflation is exclusively monetary in nature.  And since mid-2007 when the general credit crunch started unfolding, the Fed has grown broad money by the fastest annual rates seen since the aftermath of the 9/11 terrorist attacks.  This fact is indisputable.  Without a shrinking money supply, negative growth rates, there is no basis for declaring deflation.  Redefining “deflation” to mean something it is not doesn’t make it so.

AS a result we think INFLATION is coming . . . 

Inflation is Dead – what utter hooey.

The Alternate CPI puts the annualized inflation rate at 9.47%. (Data from www.shadowstats.com).

For a fascinating perspective on inflation and the adjustments to the official calculation method, watch this from Chris Martenson.

Now when you consider the inflation figures Washington puts out each month, the March’s Consumer Price Index (CPI) data; the “core” inflation rate rose a modest 0.1%. So every politician and most of Wall Street analysts point to it and proclaim that inflation is dead.

Inflation? “Not a problem” … “tame” … “easy to deal with” — those were some of the comments and headlines that came out after the figure was released.

I disagree just have a look at what is happening around you – what is cheaper than last year?

Here are just a few examples … of everyday things that are going up

  • The price of oil is up over 50% from a year ago. In April 2009 it was $50 a barrel now it is $84!
  • A gallon of unleaded gas is up 15% since April last year!
  • Cotton is up 30%
  • Copper prices are up 57%

Now, you tell me, is that 0.1% inflation? I don’t think so! The average price appreciation of the above, which are pretty much staple items, is over 10%.

That’s even a bit higher than the action we’ve seen in the Commodity Research Bureau’s Index (CRB Index) of 19 widely-traded natural resources and commodities. According to the index, prices of raw materials are up nearly 8.5% since the beginning of February.

And don’t get me started on College tuitions as are projected to increase into the double-digits in many cases for the 2010-2011 school year.

Government around the world are massaging figures – protect yourself and start your own Personal Savings Plan today as now is the time for DIY.

Why you should buy Gold.

Posted on 1st April 2010 by Trevor in Finance in Focus

Fundamental Reasons Gold Will Soar

You Can’t Ignore Inflation: The 2008 stock market panic sent stock and commodity prices – including the price of oil – into a tailspin. And that launched the big debate about whether inflation or deflation would ultimately carry the day. Keep in mind that since 2001 – under benign price inflation of roughly 2.5% – gold has managed to rise about 400%. Meanwhile, the U.S. Federal Reserve is widely expected to keep short-term rates near zero through this year, leaving the door open for inflation. In addition worldwide, central banks have rolled out an unprecedented $12 trillion worth of stimulus programs, with some of the money still to be spent.  Inflation is coming just don’t know when . . .

Inflation explained: When the economy goes down, people save more. When that happens, circulating M2 (money) also goes down because less people are spending. That would make the economy even worse, so what the government does, is it borrows money from the Fed, which makes money out of absolutely nothing, and then lends it to the government at interest.  Then this new money sort of replaces the saved money, and the recession should hopefully not get worse. 

Then, once things are better, this new money which eventually floats around is deposited at banks. Banks then use this as high powered money to create more money from thin air. About 90%, so, you deposit, $10,000, the bank can lend $9000. This isn’t YOUR $9000, it is brand new money. Your $10,000 is still there, this process doesn’t end there. Now there is $9000 of new money in the economy. That then gets deposited at another bank. Now that bank can lend $8100, and so on until about $90,000 is effectively created out of thin air!

That’s why the bailout of $700B will eventually reach about $7 Trillion. (This will expand the money supply around 30% to 50 %.) The money hasn’t been “unlocked” yet (banks are not lending).  So, once the economy picks up again, and it’s going to need employment for the money to be unlocked, we could see a lot of inflation; maybe even 10% a year for a few years.

Investment Demand is out there: Large institutional investors – hedge funds and pension funds – are making large allocations to gold, as are individual investors.  The proliferation of gold-focused exchange-traded funds (ETFs) bears this out. The SPDR Gold Trust (NYSE: GLD), the world’s largest physically backed ETF with 1,100 tons of the lustrous metal, is the sixth-largest holder of gold bullion. Individual investors have never had an easier avenue for owning gold. (However maybe this is not the best way as it is not 100% backed)

Asia, with a population that exceeds 2.5 billion inhabitants and a long-standing cultural affinity for gold, is stoking global demand in a big way. China is encouraging its citizens to buy gold and silver.

Central Banks are Becoming Net Buyers: India’s recent purchase of 200 tons of International Monetary Fund (IMF) gold was the likely impetus that pushed gold up over the $1,200 level in December. But more important is the sea change that has seen central banks change from net sellers into net buyers of gold. BlackRock Inc. one of the world’s largest investment managers, said that 2009 was that turning point. If that was the case, it will have been the first time in 20 years, as central banks have been net sellers of gold since 1988.

A Currency Crisis is Looming: The “PIGS” – Portugal, Italy, Greece and Spain (or “PIIGS,” if you want to include Ireland) – aren’t in very good fiscal shape. And they aren’t alone. Iceland has already gone over the edge. The United States, the United Kingdom, and countless other economies are struggling. And that reality has ignited a crisis of confidence about fiat currencies in the minds of many investors. Money is nothing more than paper and ink, backed by the full faith and credit of the issuer. When investors find that their faith in the issuer is shaken, the value of that currency erodes. Additional sovereign-debt downgrades from ratings agencies are but one potential trigger of a currency crisis. Under such conditions, gold – the ultimate store of value, and the oldest existing form of money on earth – will soar as investors seek to protect their purchasing power.

We’ve Yet to Reach the Mania Stage: the gold bubble that takes prices to all-time-record levels will inflate in three distinct stages. This process will start with currency devaluations in Stage One, will be fueled by growing investment demand in Stage Two and will experience its stratospheric ascent in Stage Three, the mania phase of this evolution.  Keep in mind, the entire gold industry has an aggregate market capitalization (value) below that of Wal-Mart Stores Inc. (NYSE: WMT) alone (currently about $210 billion). So as the crowd piles in, the “big money” to be made will lie with gold explorers and producers, where 1,000% returns will not be uncommon, even from today’s prices.

All these fundamentals underscore that gold prices have plenty of room to run from here.   All the physical gold in existence is worth somewhat more than $1 trillion US dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels.

It’s Time to Make Your Move

Everyone needs some exposure to gold in their portfolios, no matter their age or risk tolerance. Owning some physical coins or bars makes sense.

When will gold really take off? I think it will take a few years. But with bubbles, or speculative frenzies, one never knows. Just this week, in fact, Robert R. McEwen, the chairman and chief executive officer of U.S Gold Corp. (AMEX: UXG), predicted that gold could more than quadruple to hit the $5,000 level by 2012. Some experts have labeled this expected move as a looming “super spike.”

Despite the mania stage (we think) is still several years away, the wise investor recognizes both the importance and the potential of investing in gold.

I have no doubt that today’s $1,100 gold price level will eventually, in hindsight, look like an outrageous bargain.

WAYS TO OWN GOLD

There are many ways to own gold. The best way is to buy a few one-ounce gold coins, preferably American eagles if you’re in the United States, or Canadian maple leaf coins if you’re in Canada. With one-ounce coins, you pay the lowest commission.  The trouble with gold coins is also their advantage: they are in your possession. They can be lost or stolen. They must be mailed back to a coin dealer to sell them for money. There are commissions to pay. But, in a time of national crisis, coins are the best way to hold gold for the small investor.

You can buy gold shares – a very good idea. This is the standard approach of most investors an easy way would be with GDX or GDXJ – exchange traded funds.  There are gold miner shares on almost every exchange.

There is a Fund which invests 60% of its assets into physical gold the other 40% is invested in Managed futures which since 1990 has achieved returns of over 17% pa.

There is a fund, the Central Fund of Canada, that holds mostly gold and some silver bullion. The prices of the two metals move in tandem most of the time. Owning shares of this fund is a surrogate for owning physical gold. This is far better than GLD as there you are buying paper and not all the gold is actually there!

Always remember: if there is no proof of physical possession of gold, and if there are no storage charges for gold held in reserve, then you may be trading a futures contract, which is a promise to pay gold on demand. Promises to pay are never as reliable as gold in hand. Third-party verification of gold held against receipts issued for gold becomes important.

You should ask yourself what you are hedging against. Answers include the above fundamental reasons in the report, plus these more specific ones:

  • Dollar inflation/depreciation
  • Terrorist attack on the U.S.
  • Crisis in the bank payments system (cascading defaults)
  • Speculation: Asians may start buying gold

WHAT IS THE DOWNSIDE RISK?

The standard ones are these:

  • Net central bank sales of gold to public
  • Recession reduces price inflation
  • Recession reduces demand for commodities
  • Asians turn out to love paper money more than gold
  • Governments outlaws gold  
  • Gold-owning people actually obey the governments

The political pressure is very strong to keep a higher price of gold from identifying reduced confidence in the dollar. We have seen the government take steps to push down gold’s price. But the government also sells gold coins. It maintains the official position that gold is not relevant for monetary affairs. To outlaw gold would be to admit that gold is relevant. This might turn into a gold-buying panic. Because people can easily buy and sell gold on the Web, there are ways for people to evade the law.

A worldwide recession is possible if China suffers a major recession. China at some point will have to go through a recession because of today’s inflationary policies. But the question is: When? Gold may fall 30% from $1,100 an ounce if it does buy some more. If you have no gold, it’s not wise to bet the farm on a fall in price. Besides, if gold falls, you’ll probably think, “It’s going to fall even more. I had better wait.”  The Greece situation is the next thing to happen will they or will they not be bailed out, but really the bigger situation is who is next as Greece is about as relevant to the European economy as say Utah is to the USA.  Now what happens when California needs a bailout it is the 8th largest economy in the world on its own. Then longer down the line there is Japan the third largest economy . . . and in the end the USA.

CONCLUSION

People postpone doing what they don’t really want to do. They don’t want to take action that implies that the present system is shaky, that the government is following policies that will debase the currency, and that there is no way for the government to preserve the purchasing power of the dollar by anything other than ceasing all monetary expansion, which the Federal Reserve System never does.

April 2010 Finance in Focus

Posted on 1st April 2010 by Trevor in Finance in Focus

Here’s some food for thought: the Chinese market bottomed first, it bottomed in November of 2008, whereas the US Markets (and most world market’s) bottomed in March 2009.  Currently the SSEC and Chinese markets have not made new highs.  Perhaps this time around the Chinese market will top first, whereas it bottomed first last time.  Who knows, but it has a VERY nice triangle setting up, let’s see which way this breaks, if it’s to the upside instead, that would be super bullish, if it’s to the downside . . .something to keep note of we think.

 

New Home Sales at Record Low

The Census Bureau reported that sales of new single-family homes in February were at a seasonally adjusted annual rate of 308,000. This is a new record low and a 2.2% decrease from the revised January rate of 315,000.

Some attribute the record low sales to February’s weather, which covered much of the country in snow. Others contend that the new home tax credit that was originally supposed to end last year merely moved sales that would have taken place this year to last year. In my view, both factors likely played a role in the February figures, but it’s clear from this chart I found on www.calculatedriskblog.com that the housing market is still in deep trouble.

 

And in case you think we may have finally reached the trough of the housing crash, I’d like to remind you about the overhang of ARMs (adjustable rate mortgages) that is due to reset over the next two years. There’s a lot of default on the horizon and the market will tank further.

 

 

The national debt of countries represents how much money the government of that country owes. Like a household budget, national debt gets larger when a government spends more than it takes in. This can continue for years, or even decades. This budget deficit is the total amount of this debt that has grown over time, with interest charged adding significantly to the amount owed by the government.

The amount owed varies greatly with the amount of money a country generates, its population and how much its government spends. In Germany, the national debt is $1.79 trillion. This represents 62.6 percent of Germany’s gross domestic product, or GDP. In The U.K. the national debt is $42.2 trillion. This is 47.2 percent of the GDP of the U.K.

In Russia, the national debt is $151.3 billion. This is 6.8 percent of the Russian GDP. Italy owes a national debt of $1.89 trillion, or 103.7 percent of the Italian GDP. The national debt of France is $1.40 trillion. This is 67 percent of France’s GDP.

One of the highest levels of national debt relative to the country’s GDP can be found in Japan. The Japanese national debt is $7.47 trillion. This is 170.4 percent of the Japanese GDP. India has a national debt of $2.55 trillion. This debt is 78 percent of the GDP of India. Zimbabwe has a national debt of $472.51 billion. This level of national debt is 241.2 percent of Zimbabwe’s GDP.

In the Americas, The United States has a national debt of 8.68 trillion. In the U.S., this is 60.8 percent of the American GDP. The Canadian national debt is $814.26 billion. In Canada, the national debt is 62.3 percent of the GDP. In South America, Argentina has a national debt of $293.56 billion. The Argentinean national debt is 51 percent of the GDP of Argentina.

The gross domestic product of a country is the market value of all of the products and services that a country produces in one year. This includes spending that is done by the citizens of the country and by the government of that country. It includes the value of items produced within the county and exported elsewhere, but it does not include the value of any imported items. The GDP is the primary way to calculate the size and status of the economy of a country as a whole. It is calculated quarterly as well as yearly.

A comparison:  Fitch downgraded Portugal’s debt aweek or so ago and Monday the 29th of March they also downgraded the State of Illinois to a- (which is 4 grades above JUNK)  — lets put this in prospective.  Illinois GDP is 633 Billion.  Portugal is 236 billiion and Greece is 343 Billion – Therefore Illinois is bigger; this mountian of Debt is just starting! 

Why you should Buy Gold.

March Finance in Focus

Posted on 1st March 2010 by Trevor in Finance in Focus

GOLD

The IMF stated that sales will be conducted in the open market, which is interesting because until now, gold has only been made available to central banks. While the IMF remains open to central banks buying some of the gold, sales will be conducted “in a phased manner over time” to avoid disruptions to the open market.

So, will IMF sales depress the gold price? Well, remember the price rose with the first sale, when it was announced India was buying 200 tonnes of the 212 for sale. But that was an off-take deal, not an open market sale, so the question is legitimate.

One way to look at it is this: global mine production was 80.9 million ounces in 2009, so the IMF’s 6.7 million ounces could be a market-jolting 8.2% addition if dumped all at once. And an 8.2% load would indeed upset a market if we were talking about strawberries or anything else that people buy only for the purpose of consuming.

But most gold isn’t bought for the purpose of using it up. It’s bought for the purpose of holding it. So the relevant comparison for the IMF’s 6.7 million ounces isn’t annual mine production. Instead, we should compare it to the world’s existing stockpile of gold, which is roughly 2 billion ounces. The IMF sale would add just 0.3% to global inventory – hardly a market trasher.

Further, we’ve been down this road before with the IMF. When they sold gold in the 1970s, the price dropped upon the announcement of the sale, but then rose when actual sales took place.

And the dirty joke is this: when the IMF sold gold in the 1970s, it marked a bottom in the price.

The IMF provides some very cushy jobs for the right people, along with a perpetual series of exquisitely catered conferences for the politically connected and politically correct. These people are not exactly known for being the brightest economic decision-makers. However noble their cause, the fact that they’re selling at all in the current environment, given the enormity of the monetary crisis that will only worsen as time goes on, tells me I want to be doing the opposite.

What happens if China buys the IMF’s gold. . .

Debt Watch

The debt-to-GDP ratio for Italy exceeds Greece’s at present, and Japan’s is well above the other countries. Indeed, Japan has the most highly indebted government among OECD countries when measured as a percent of GDP. Note that the U.S. government has a debt-to-GDP ratio that is more or less equivalent to Portugal’s, where yields on government bonds have backed up somewhat this year due to concerns about fiscal sustainability. Is Greece the Tip of the Iceberg?

 

 

 

 

 

 

 

 

 

Uranium

Quite simply the demand for uranium is outstripping the primary supply. In fact, starting from now, uranium supply needs to double just to catch up with current demand. And that’s not even taking into account the expected surge in demand as hundreds of new nuclear reactors come on linein the next ten years.

Even in the United States, which has not built a new nuclear plant in thirty years, US President, Barack Obama announced loan guarantees for two new nuclear plants to be built. But since the mid 1990s the nuclear energy industry has been lucky. In a way, nearly half of the demand for uranium has been met thanks to the end of the Cold War.

How so? You may not believe this but almost half of all uranium used in the world’s nuclear reactors has been sourced from… ex Soviet nuclear warheads! Maybe you have heard of it, it’s been referred to as the “megatons to megawatts” program. And it’s been running since 1993, but it ends in 2013.

Key Fact: There are currently 436 nuclear reactors in operation worldwide.
Right now there are over 50 reactors under construction in 13 countries along with 142 nuclear power reactors planned and an additional 250 which are being proposed. (source: World Nuclear Association)

According to Steve Kidd at the World Nuclear Association, another 142 are in the pipeline, and 53 of these are already under construction. Of the latter, 20 are in China. “We forget that in France in the 1970s they were building five new reactors a year,” he said. “The Chinese are just doing what the French did, but on a Chinese scale.”

The mining boom has been boosted by a surge in the uranium price. “For three decades uranium cost $10 a pound because nuclear power wasn’t seen as very desirable. Now that we have all these concerns about the environment and going low-carbon, it’s different. It hit $137 [a pound] two years ago,” said Joe Kelly, head of nuclear fuel markets at ICAP Energy. Today the spot price for un-enriched uranium is $42 a pound, enough for most projects to go ahead.

Contact us at Banner for selected shares in this sector.

 

 

 

 

 

 Stories of Interest:

WASHINGTON (Reuters) – U.S. states face a total shortfall of at least $1 trillion in their funds for employees’ pensions and retirement benefits, and their financial problems are quickly mounting, according to a report released by the Pew Center on the States on Thursday http://www.reuters.com/article/idUSTRE61H13X20100218

http://www.news.com.au/business/secret-summit-of-top-bankers/story-e6frfm1i-1225827289543

http://news.bbc.co.uk/2/hi/business/4684108.stm

http://www.news.com.au/money/property/melbourne-hits-1-billion-property-mark/story-e6frfmd0-1225835436896

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February Finance in Focus

Posted on 18th February 2010 by Trevor in Finance in Focus

Healthcare news in Japan — the ‘new’ developments concerning the National Insurance System/Renewing Visa scenario.

http://search.japantimes.co.jp/cgi-bin/nn20100202a1.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+japantimes+(The+Japan+Times%3A+All+Stories)&utm_content=Google+Reader

DEBT WATCH

In 2009, the book This Time is Different – Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Take a look at the table below outlining federal government receipts (revenues) over the last decade.

If you do the math, you’ll notice that total tax revenues experienced an average annual increase of 0.9% over the past ten years.

Now look at federal government outlays (spending) over the same period.

So, while federal government revenues have grown by an average annual rate of less than one percent over the last decade, spending has nearly doubled during the same period and increased at an average annual rate of 7.9%.

Obama’s new budget calls for a nearly 9% increase in spending over the 2009 level. The only way we won’t have another record deficit in fiscal 2011 will be if tax revenues grow by almost 15%. I highly doubt that, given the state of the economy and unemployment levels. What’s much more likely is for tax revenues to ring in at similar levels to today, which would suggest a 2011 budget deficit of around $1.7 trillion (nearly 75% higher than the CBO’s forecast of $980 billion). Even if tax revenues somehow climbed back to the levels of 2006 – 2008, we’d still be locked into a $1.3 trillion-plus deficit, more than 30% above the CBO’s ridiculous forecast.

GOLD – time to buy more for Fiscal insurance.

1)     The fundamental case for gold is as strong as ever. Production has been falling since 2001. Supply is tight. Overall demand continues rising. Awareness is spreading. Concurrently, money supply is grossly bloated. Debt at all levels has skyrocketed. Dollar printing and bailouts seem endless. And most importantly, the dollar’s woes are far from over. That the abuse of the world’s reserve currency will lead to price inflation is inevitable. The destruction of the dollar’s purchasing power is not a short-term phenomenon and will take years to fully play out. Your best defense is gold.

2)     The gold price will hit another record high in 2010. Gold begins the new year with tremendous momentum behind it: central banks are now net buyers for the first time in 22 years… numerous hedge fund managers are buying physical gold… China will be crowned the world’s #1 gold producer and buyer… new gold ETFs were launched in Singapore and Hong Kong… it’s a long list. And the global arousal of interest in gold will only heighten as concerns about the dollar fester. Further, mainstream media’s usual chilly sentiment toward gold began to thaw late last year (albeit skeptically), and we expect that sea change to strengthen, particularly on gold’s next big leg up.

3)     Seize the day – the Mania is still ahead. Our view remains steadfast that the rush into gold (and silver) is yet to come. That said, we’re not convinced it’s going to happen this year (though it certainly could), but rather that 2010 may be the “platform” year when the stage is set for the big run-up. Translation: any big gold sell-off could be the last chance to get positioned at anywhere near today’s prices.

So, if gold falls into three figures, you’ll find me (and everyone else at Casey Research) queued at our friendly neighborhood precious metals dealers. And a gold price below $1,000 will truly be, in my opinion, a carpe diem moment.

Here are some examples of gains in junior gold/silver exploration stocks between the years 1975 and 1980:

Lion Mines – 1975 price: $0.07 / 1980 price: $380 i.e. an increase of 542,757%

Azure Resources – 1975 price: $.05 / 1980 price: $109 i.e. an increase of 217,900%

Wharf Resources – 1975 price: $.40 / 1980 price: $560 i.e. an increase of 139,000%

Mineral Resources – 1975 price: $.60 / 1980 price: $415 i.e. an increase of 69,067%

Steep Rock – 1975 price: $.93 / 1980 price: $440 i.e. an increase of 47,212%

Bankeno – 1975 price: $1.25 / 1980 price: $430 i.e. an increase of 34,300%

Energy:

The cheap, easy-to-pump oil is fast being used up.  To be sure, there were plenty of oil discoveries in 2009, especially in Brazil and the Gulf of Mexico. A whopping 10 billion barrels of oil was added to reserves, the highest rate since 2000. However, the world is consuming around 83 million barrels a day, which equates to 31 billion barrels a year. So, even in a good year, we barely replaced one third of the oil we consumed

The world is producing up to 93 million barrels per day, but production at existing wells is declining at up to 8% a year. That means we have to add more than 6 million barrels per day every year to keep production flat. Five years down the road, we’ll likely have to replace 30 million barrels of production. That’s more than three times the amount of oil (8.1 million barrels per day) that Saudi Arabia produced in 2009.

That means we have to drill a lot more wells. And the oil we find is very deep and therefore very expensive. Oil companies are now putting drills down 4,000 feet in the Gulf of Mexico to then drill through 35,000 feet of rock. These wells are deeper than Mount Everest is tall! Assuming that significant finds are made, it will still be 7 to 10 years before the wells go into production.

Oil prices longer term are going up, until there is an alternative . . . on final thought on Energy prices – do world’s governments actually want higher energy prices?  The simple reason is the TAX generated on these is greatly needed – as tax revenue in all other areas is falling. Things that make you go Humm?

Comment on BONDS from INSTITUTIONAL ADVISORS

Zero percent interest rates create different economic environment, just like Zero degrees Kelvin (a.k.a. absolute zero) creates a different physical environment. Once we hit 0% it is very difficult to turn back, mainly because we can’t go much lower and therefore we don’t get any more relief from a further decline in rates. While the great majority of experts are talking about exit strategies and are attempting to time when the Fed and BOC will start raising rates, I would like to point out that the Bank of Japan has stuck with a 0% interest rate policy for close to 2 decades. At this point, that appears to be the path of least resistance in my opinion.

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Money isn’t everything, according to a group of affluent Americans surveyed by Merrill Lynch Wealth Management. Focusing on family and friends, it turns out, gained in importance through the recession.

Just over half of retired respondents with at least $250,000 to invest said they wished they had focused more on their “life goals” than on “the numbers,” according to the firm’s Affluent Insights Quarterly, released Jan 18th. In fact the leading response was wishing they had given more thought to how they wanted to live in retirement (38 percent) followed by wishing they had worked with a financial adviser earlier (23 percent) and given up more luxuries to reach their retirement goals (18 percent).

Getting advice on your Finances and insurance

Why do I need financial advice on life insurance?

Life insurance is a very personal product. There’s only one of you. And your cover needs to be tailored to your circumstances, and your budget.

The amount of cover you need, and the types of cover you need, can vary greatly depending on your individual circumstances.

Besides, not all insurance policies are created equal – some have additional, and included, benefits and features.

An adviser can also help you make your insurance more affordable by recommending strategies including:

  • taking advantage of the tax-effectiveness of insurance
  • combining your cover with a family member to reduce your premiums
  • choosing the right combination of benefits and extra options.

By looking at your income, your debts, and your family’s circumstances, a Banner adviser can help you get the right cover – and the right structure – to meet your needs and your budget.

Arranging life assurance cover is the best way to ensure your family is taken care of in the event of your death, giving both you and them peace of mind.

Just a reminder

All USA federal debt, including unfunded liabilities, isn’t 100% of GDP, but 500%+. In most industrialized countries, federal-government debt is between 350% and 360% of GDP. Eventually the U.S. will arrive at a point where interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30% you are done. You go into default or your currency breaks down and your system collapses. The problem you will run into first is a dramatic increase in individual tax rates. You’ll see bigger wealth redistribution programs than you can believe.

The end game for Japan?

Thoughts from The Absolute Return Letter – February 2010

The first country to really feel the pinch could very well be Japan; in the bigger context, Greece is just the appetizer. Japan’s debt-to-GDP ratio has grown from 65% in the early 1990s when their crisis began in earnest to over 200% now. Fortunately for Japan, the high savings rate has allowed shifting governments to finance the deficit internally with about 93% of all JGBs held domestically[3]. This is the key reason why Japan gets away with paying only 1.3% on their 10-year bonds when other large OECD countries must pay 3-4% to attract investors.

Now, predicting the demise of Japan has cost many a career over the years. Despite the ever rising debt, and contrary to many expert opinions, the yen has been rock solid and bond yields have remained comparatively low. I often hear the argument from the bulls that the Japanese situation is sustainable because they, unlike us, are a nation of savers. Wrong. They were a nation of savers.

Looking at chart 5, it is evident that the demographic tsunami has finally hit Japan. The savings rate is in a structural decline and the Ministry of Finance in Tokyo may soon be forced to go to international capital markets to fund their deficits. I very much doubt that non-Japanese investors will be as forgiving as the Japanese, and that could force bond yields in Japan in line with US and German yields. Herein lies the challenge. Japan already spends 35% of its pre-bond issuance revenues on servicing its debt. If the Japanese were forced to fund themselves at 3.5% instead of 1.3%, the game would soon be up.

So if you have Yen sitting in the bank time to move and take advantage of the current exchange rate  . .

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