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GIM Charts - Templeton Global Income Fund
Top Chart = GIM
Middle Chart = NAV of GIM
Bottom Chart GIM Premium/Discount
This seems like it should be an interesting board- I'm always looking for these kinds of investments. Too bad, it appears dead, is anyone else interested in this topic?
Ron Paul & Michael Hartman comments:
One of the real voices for freedom in the USA is Congressman Ron Paul who writes a weekly column called “Texas Straight Talk,” and his comments dated October 25th are not the same things you heard from the two presidential candidates. It’s a quick read, so here it is.
Ron Paul:
Government Debt- The Greatest Threat to National Security
October 25, 2004
Once again the federal government has reached its “debt ceiling,” and once again Congress is poised to authorize an increase in government borrowing. Between its ever-growing bureaucracies, expanding entitlements, and overseas military entanglements, the federal government is borrowing roughly one billion dollars every day to pay its bills.
Federal law limits the amount of debt the U.S. Treasury may carry, and the current amount-- a whopping $7.4 trillion-- has been reached once again by a spendthrift federal government. Total federal spending, which now exceeds $2 trillion annually, once took more than 100 years to double. Today it doubles in less than a decade, and the rate is accelerating. When President Reagan entered office in 1981 facing a federal debt of $1 trillion that had piled up over the decades, he declared that figure “incomprehensible.” At its present rate of spending, the federal government will soon amass $1 trillion of new debt in just one year.
Government debt carries absolutely no stigma for politicians in Washington. The original idea behind the debt limit law was to shine a light on government spending, by forcing lawmakers to vote publicly for debt increases. Over time, however, the increases have become so commonplace that the media scarcely reports them-- and there are no political consequences for those who vote for more red ink. It’s far more risky for politicians to vote against special interest spending.
Since 1969, the federal government has spent more that it received in revenues every year. Even supposed single-year surpluses never existed, but were merely an accounting trick based on stealing IOUs from the imaginary Social Security trust fund. Remember that the total federal debt continued to rise rapidly even during the claimed surplus years. Since Congress is incapable of spending only what the Treasury takes in, it must borrow money. Unlike ordinary debts, however, government debts are not repaid by those who spend the money-- they’re repaid by you and future generations.
The federal government issues U.S. Treasury bonds to finance its deficit spending. The largest holders of those Treasury notes-- our largest creditors-- are foreign governments and foreign individuals. Asian central banks and investors in particular, especially China, have been happy to buy U.S. dollars over the past decade. But foreign governments will not prop up our spending habits forever. Already, Asian central banks are favoring Euro-denominated assets over U.S. dollars, reflecting their belief that the American economy is headed for trouble. It’s akin to a credit-card company cutting off a borrower who has exceeded his credit limit one too many times.
Debt destroys U.S. sovereignty, because the American economy now depends on the actions of foreign governments. While we brag about our role as world superpower in international affairs, we are in truth the world’s greatest debtor. Like all debtors, we are not truly free. China and other foreign government creditors could in essence wage economic war against us simply by dumping their huge holdings of U.S. dollars, driving the value of those dollars sharply downward and severely damaging our economy. Desmond Lachman, an economist at the American Enterprise Institute, states that foreign central banks “Now have considerable ability to disrupt U.S. financial markets by simply deciding to refrain from buying further U.S. government paper.” Former Treasury secretary Lawrence Summers warns about “A kind of global balance of financial terror,” noting our dependency on “the discretionary acts of what are inevitably political entities in other countries.”
Ultimately, debt is slavery. Every dollar the federal government borrows makes us less secure as a nation, by making America beholden to interests outside our borders. So when you hear a politician saying America will do “whatever it takes” to fight terrorism or rebuild Iraq or end poverty or provide health care for all, what they really mean is they are willing to sink America even deeper into debt. We’re told that foreign wars and expanded entitlements will somehow make America more secure, but insolvency is hardly the foundation for security. Only when we stop trying to remake the world in our image, and reject the entitlement state at home, will we begin to create a more secure America that is not a financial slave to foreign creditors.
Hartman:
Now this is one politician who calls a spade a spade. Forget about political parties…just think of our current political policies. We just keep digging our hole deeper and deeper and I keep asking myself where the plan is to correct the enormous imbalances. Potential solutions were not a focus of the campaign dialogue. I’m also making a big deal about this because we are now up against the federal debt limit and we have a huge round of treasury auctions scheduled for next week. Our government is so broke (bankrupt) that they must raise the debt ceiling by November 18th or stop many of the normal government functions because they will have no cash. In mid-October the Treasury Department suspended investments in a federal employee pension fund to keep the government below its borrowing limit. The Treasury has already said that due to the debt limit constraints, it does not have the capacity to settle the 4-week bill auction scheduled to be held on November 16th.
Next week the Treasury will be conducting another quarterly refunding for a total of $51 billion, roughly half the borrowing needs for the fourth quarter. For the first quarter of 2005 the government expects to borrow the record sum for one quarter of $147 billion. For next week the Treasury will auction $22 billion in three-year notes on Monday, $15 billion in five-year notes on Tuesday, and $14 billion in ten-year debt on Wednesday to raise a grand total of $3 billion of new cash for the government to spend. The balance of $48 billion from the auctions will be used to pay off maturing debt.
You see, the government never pays back any of the money they borrowed in the past…they just keep borrowing more to pay the old debt plus any new money that’s needed. Remember this is happening at a time when the federal government’s income is reduced due to lower tax receipts. If we ran our households in the same manner, bankers would laugh if we went in to see them every three months to re-liquefy our checking accounts with new cash and consolidate all the credit card debt. The Treasuries’ “refunding” takes place like clockwork in the middle of every quarter and will continue every quarter because we do not have the capacity to pay off our debts. In fact, according to Ron Paul the government has not lived within their means since 1969. Every year since ’69 the feds have spent more money than they could generate in revenues, and the trend continues to accelerate. We are the biggest debtor nation in all of world history.
http://www.financialsense.com/Market/hartman/2004/1104.html
Dr Richard Appel: "Not a pretty picture of the potential outcome when the world ultimately refuses to accept the dollar".
Be Careful for What You Wish
Dr Richard Appel
November 4, 2004
Many investors and traders that have a keen desire for higher gold complex prices, believe that it will be wonderful when gold finally breaks free from the shackles that have long restrained it, and soars wildly higher in price. Some of these individuals believe that gold is headed towards $600 while others can barely contain their emotions believing that the sky's the limit. Many of these excited souls ponder the extent of their future wealth when the noble metal ultimately surpasses its earlier $875 high set in 1980, and soars to the $2,000, $3,000 or even $4,000 level that certain conditions may ultimately justify. Unfortunately, few direct their thoughts to even remotely consider the events that must first unfold in order to propel gold to these mind-boggling prices. Further, far fewer have any understanding of the consequences to our great nation and its citizenry, themselves included, that will result if these underlying driving forces truly play out, and propel the eternal metal to the untold heights that they believe are its fate.
I feel that the majority of gold community members who believe that the yellow metal is destined to greatly rise, ascribe to the belief that the dollar will sharply fall in parity against the currencies of our international trading partners. They rightly recognize that our current account, balance of payments, and fiscal deficits cannot be sustained, and will one day prove damaging to our nation. They give lip service to the recognition that at some point other countries will demand a real form of payment, in return for the valuable goods and services purchased by our country, rather than continue to solely accept declining dollar credits. Yet, they avoid believing what they see when they gaze into the future.
It has been incredibly beneficial for America to possess the world's reserve currency. Our officials learned long ago how to use this condition to their advantage. It provided our Federal Reserve with the ability to literally create dollars at will, without the need for our inhabitants to be similarly productive as did all of those who supplied us with their wares. Heretofore, controlling the reserve currency came with the responsibility to maintain its integrity and value. This was the case for decades because it benefited international trade and fostered both a strong American economy and financial system.
Unfortunately, for various reasons this goal has been abandoned. At the forefront of these, is that possessing the world's primary currency allowed our country to become supported by the sweat and efforts of those toiling in far away lands, without our giving them anything of value in return. All that was necessary was to create dollar credits literally from thin air, and use them to pay for our foreign purchases. Sadly, this state has caused America to become accustomed to living far beyond its means. This, without the knowledge, recognition or understanding of this true underlying reason by most of our fellow citizens.
The enormous and increasing U.S. budget deficits on the other hand are similarly unsustainable. To date, countries such as Japan and China along with the European Union members have helped fund these deficits. They acquired Treasuries with the expectation that the dollar would maintain its value, and gladly purchased our bills, notes and bonds with the belief that they made a wise investment. History taught them that when they desired to sell these assets they would not only receive a similar or greater amount of their own currency in return, but would also gain interest on their holdings in the interim to boot. They were in for a shock.
I believe that gold is presently quite undervalued. To my mind the purchasing power of an ounce of gold is far greater than the current $425 for which it sells. However, in order for gold to trade far in excess of the $600 or so that I feel conditions currently warrant, a number of events must first transpire.
The United States has been riding the crest of a growing tidal wave since 1971. This began when President Richard M. Nixon "closed the gold window." That infamous day occurred in August when I was first honeymooning in Europe. During the ensuing week or so after the announcement I could not exchange more than a $20 bill or traveler's check for any local currency. It was that fateful announcement that removed the final vestige of gold backing from the dollar. This opened the door to an unconstrained issuance of paper money, and later electronic dollar credits, by our Federal Reserve System.
Throughout the subsequent period our country became increasingly dependent upon the rest of the world's generosity, or some say naivete. Initially, they bought our Treasury paper with the expatriated dollars that flowed from our land in exchange for their products. This helped fill the gap and largely paid for our government's chronic fiscal deficits. Later, our ever kind trading allies gladly accepted our readily produced dollars in exchange for their valuable services and goods. They were thrilled when the dollar soared in value on international markets between 1995 and 2001, and barely batted an eye when the greenback reversed course and began its present descending path.
We have all heard the euphemism that, "the U.S. pretended to pay foreigners with dollars and they pretended to be paid." In truth, it became a symbiotic relationship. The U.S. government found a way to finance their growing deficit spending propensity, and our trading partners required an eager outlet to sell their goods and services. This in turn helped improve their economies, their employment rates and the standard of living for their citizens. It also helped keep their leaders in power.
The result was an unprecedented explosion in both global economic growth and the creation of U.S. dollar credits. Unfortunately, just as it appears that we are in the twilight of the world's greatest, widespread economic boom, we are also at the dawn of what will likely become the demise of the heretofore almighty dollar.
At some point, one by one, our trading partners will balk at being reimbursed with dollars for delivering their goods onto U.S. soil. The likely trigger for such an event will be the declining parity of the dollar. The question is the level of pain that each country can withstand, i.e. the extent to which the dollar must fall against their local monetary units, before they rebel.
What few people recognize or care to consider are the events that will unfold when this time arrives. True, gold will be at a far higher dollar price. But what economic and social price will be its cost?
When the world begins to reject the dollar they will sell their accumulated U.S. Treasuries. They will no longer desire these vehicles to act as a store for their dollar holdings. This will cause a sharp increase in domestic interest rates as their Treasury paper is sold into the market. Our earlier loyal trading partners will then take their received dollars and sell them for their own currencies. This will act to further depress the dollar's value on the world market. Further the Federal Reserve, who will be the ultimate redeemer of the Treasuries, will be forced to issue new dollar credits. This will create a flood of dollars entering our monetary system, will balloon our money supply, and threaten a serious outbreak of domestic inflation.
The combination of increasing interest rates, a falling dollar, and a sharply rising money supply will produce a second series of events. The higher rates will damage the balance sheets of our country's businesses and will threaten the housing market. Further, the monthly interest payments on our already highly debt burdened populace will soar. Stocks will weaken and single family home sales will decline. This will drive consumers to limit their purchases.
These damaging events will be amplified when the "wealth effect" begins to wear off and Americans experience a triple whammy. Stocks will plummet, homes values will fall, and the news of layoffs will fill the airwaves. This will act to further restrict consumer spending and will foster a sharp decline in business activity.
Additionally, the falling dollar will increase the price of imported goods entering our markets. This, combined with the sharply rising money supply, will not only add to the cost of living but will promote the threat of inflation. Further, foreigners will reduce their U.S. stockholdings for fear of additional currency and stock market losses.
Consumers, already reeling from their increased cost of living, the fear of additional stock and home equity losses, and the threat of reduced incomes or their own unemployment, will further retard their spending. This will add to the damage sustained by our fragile economy and place still more workers on the unemployment rolls. These will swell while personal and business bankruptcies soar, and the cycle will feed upon itself and spiral lower.
Of course the Federal Reserve will attempt to counteract these forces. We have already been comforted by statements from Alan Greenspan and Ben Bernanke, a Fed governor, that they will create dollars at will if needed through various schemes to circumvent a catastrophe. However, if they execute their methods they will only worsen the outcome. Yes, the Fed's machinations will likely temporarily forestall a severe economic downdraft and may indeed avoid a derivative meltdown, but at what cost. If they aggressively act in this fashion their deeds will only further damage the integrity and value of the dollar, drive gold far higher in price, and likely precipitate a damaging inflationary event. In fact, we may be forced to endure the worst of all worlds where our domestic prices are soaring while business is stagnating or collapsing.
I have not painted a pretty picture of the potential outcome when the world ultimately refuses to accept the dollar. I have done this with the desire to warn readers to protect themselves. "Forewarned is forearmed." I would highly recommend that you greatly reduce all forms of debt. Further, I believe that you should not only increase the percentage of your gold and gold share holdings but Americans should also add to their cash positions and hold them in the form of short-term U.S. Treasuries. I hope that our leaders have prepared for such an event and are successful in the execution of their contingency plans. However, for those who will continue to anticipate a joyous and happy ending to soaring gold and gold equity prices remember, be careful for what you wish.
November 4. 2004
Dr Richard Appel
http://www.financialinsights.org/
Jim Rodgers interview:
_____________________
Q: What's your preferred approach to commodity investments -- futures, commodity company stocks, other?
A: Futures nearly always do better than stocks. A recent Yale study showed that one would have done three times as well investing in commodities rather than commodity stocks.
Q: If you had to put $5 million to work, what would your asset allocation be?
A: Commodities and foreign currencies.
________________
When it comes to stocks and bonds, Rogers says, "There will not be any great bear or bull period like there was in the 1980s and 1990s." he says. His pessimism also extends to the U.S. dollar, which he thinks will be in a decline for the next 20 years, with great volatility for all currencies in the coming decade.
The commodities Rogers says he would buy today are coffee, sugar, and perhaps cotton. For income in the difficult period he sees ahead, he suggests short-term interest-bearing paper -- he expects interest rates to be rising around the world because of a period of stagflation similar to the '70s.
These were a few of the points he made in an investing chat presented Oct. 28 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Jim, based on your world view, what's your take on the markets right now?
A: Well, the bond market has now peaked. It peaked in 2003 and will be in a bear market for 15 to 20 years, with rallies of course. The U.S. stock market will fluctuate up and down for the next 10 to 20 years. There will not be any great bear or bull period like there was in the 1980s and 1990s.
On the nearer term, I expect the years 2005 and 2006 to be difficult years in the U.S. stock market. That would extend to most Western stock markets as well. If you want to be in a bull market, you should invest in commodities. That's where we'll have a bull market for the next 10 to 20 years. The currency market -- I would suggest that people sell the U.S. dollar because it will be in decline for the next 20 years.
Q: Today's news of China's unexpectedly raising its key interest rate knocked down commodities prices and stocks. Is the commodities bull just about over -- or would you still invest in them at this point?
A: In every bull market there are many consolidations along the way. Commodities have been very hot for the past five years or so, so we're well overdue for a consolidation. I expect things to get worse in China. I expect there to be a hard landing.
But if you see the cover of BusinessWeek next year saying "Turmoil in China," reach for the phone and buy all the commodities you can and all the China [holdings] you can, because that will be your next great buying opportunity, if it happens that way. I'm not selling my commodities or my China [holdings], although I do expect further consolidation in both.
Q: It's my opinion that Bretton Woods is on the verge of collapse. What do you think will take its place?
A: I concur. I also concur that the U.S. dollar will suffer during this period. I would expect there to be a decade of great volatility in currencies around the world -- and perhaps even exchange controls in the U.S., eventually. I don't know what will take its place. I don't even see a currency that will replace the U.S. dollar as the world's reserve currency at the moment -- perhaps if things get really desperate, people may leap to gold for a while, but gold isn't something that can permanently solve the world's problems.
Q: Will this country be able to get rid of its debt? Are we heading for another Depression?
A: No country in the world that has gotten itself into this kind of debt situation has ever in history gotten out without a crisis or a semi-crisis. The same will happen in the U.S., unfortunately. And even then, we will not solve our debt problems. When England went from being the richest, most powerful country in the world, the situation declined for over three generations. We have entered a period like that as well.
Q: Going to China -- investment ideas to look for?
A: Well, it's too early to buy shares in China. I would wait for a hard landing next year. But start looking around and doing your homework while you're there. I don't know what's going to go down the most as China retrenches.
Q: You had mentioned a housing bubble about a year ago -- what do you think now?
A: Well, there's no question that there was and is a housing bubble in some parts of the country. It has already started leveling off and/or declining in some places. In others, it's still hot. Financial areas such as Massachusetts will certainly suffer housing losses as the bubble pops. Commodity areas such as Iowa will have nice housing markets for several years. The bubble is not everywhere and will not continue everywhere. It just depends on the location.
Q: Are you still high on international investing?
A: Yes. I'm high on investing in wherever the opportunities are, and that's often internationally. Therefore, yes, one should never limit one's investments to one country because you will miss great opportunities.
Q: Where would you look for income/yield?
A: That's a great question. I would not own bonds anywhere in the world unless it were a very special situation. I would keep my money in short-term interest-bearing paper and suffer a temporary lower income because rates will be rising in most of the world.
Q: Can one be a long-term buy-and-hold investor and make money, or does one need to be a trader?
A: Well, if you find the right instrument, the right security, then yes, you can be a buy-and-hold. But in my view, the next 10 to 20 years in the U.S. stock market, that will not be a satisfactory way to invest unless you find the few securities that might do well even in a period like that. The investors who'll do well are the ones who can buy low and sell when things rally and repeat the process throughout the decade.
Q: What commodities would be ripe for investing now, if any?
A: Oh, if I were going to buy a couple today, I would probably buy coffee and sugar, maybe cotton.
Q: How does an individual investor go about investing in cotton?
A: You can buy cotton futures -- it's very simple. I urge you not to do it unless you know a lot about cotton. I urge you not to do it on thin margin unless you know a lot about what you're doing.
Q: What's your outlook for gold and gold stocks?
A: I own some of both. I am less optimistic about gold than I am about many commodities.
Q: Does the energy sector still have a significant upside left?
A: Well, oil is overdue for a correction. But the price of oil will be much higher over the next few years. The surprise will be how high energy prices stay and how high they go.
Q: What do you think natural gas will do? What do you think of natural gas royalty stocks?
A: Natural gas will continue to go higher over the next few years. The question concerning natural gas royalty stocks is the status of their reserves. If they're not replenishing their reserves, the income will dry up as the reserves dry up.
Q: How about investing in traveling around the world?
A: It's a great experience. I urge everyone to do it. It's a wonderful way to find out what's really happening in a country and a wonderful way to find investments.
Q: From your travels, what countries did you find most intriguing for investment?
A: China, Canada, Angola, Australia, Tanzania, Ethiopia, Japan, New Zealand, and Bolivia.
Q: Why wouldn't interest rates come down if economies are slowing?
A: Because there is inflation in the world, and inflation will be getting worse. We'll have a period of stagflation, just as we did in the 1970s.
Q: Would utilities be a good investment in stagflation?
A: Not normally, because the costs of building new plants will rise dramatically. And they normally cannot get rate increases as rapidly as prices rise. However, in the next 10 years, there will certainly be a shortage of utility capacity in much of the world. So they'll be better this time around than last time.
Q: Are you shorting the U.S. dollar?
A: I'm not shorting the U.S. dollar, but I am moving money out of the U.S. dollar into other currencies. At this precise time, in fact, the U.S. dollar is probably overdue for a rally. So I certainly would not be shorting it now, or this week.
Q: What about water shortages? Our generation or next?
A: No, they're already occurring in our generation in various parts of the world. Those shortages will continue to get worse. For example, in the Southwestern part of the U.S. or in the area east of the Red Sea and other areas, if you can find a way to purify water, pump it, or move it to the needed areas, you'll make a fortune.
Q: I'm wondering about soybeans and Bunge (BG ). What's your take?
A: Well, I'm optimistic about most agricultural products, including soybeans. Bunge is not a grower of agricultural products, but a processor and handler of commodities. The growers will do better, but people like Bunge have traditionally done well also.
Q: What's your preferred approach to commodity investments -- futures, commodity company stocks, other?
A: Futures nearly always do better than stocks. A recent Yale study showed that one would have done three times as well investing in commodities rather than commodity stocks.
Q: Is silver a good investment now?
A: I own silver. I expect to make more in other commodities, but I do own silver.
Q: If you had to put $5 million to work, what would your asset allocation be?
A: Commodities and foreign currencies. And sometime this fall or winter, I would sell financial stocks short in the U.S.
Q: What about oil stocks?
A: Well, I own some oil stocks. I do not own U.S. oil stocks, I own international oil stocks. There probably will be a better time to buy them later as oil consolidates.
Q: What's the best way to invest in coal? Would you?
A: The only way I know to invest in coal is through coal shares, and I do expect coal to do well over the next several years. If you buy a coal share, make sure it has big reserves.
Q: Where should the average 401(k) investor keep his money?
A: At the moment, I would be keeping it in money-market funds.
Capital Preservation-Debt & Money Supply Primer
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=34679
Well written and brief essay on a complex subject...
++++++++++++++++++++++++++
by Richard Benson
Money Created 'Out of Thin Air'
July 31, 2004
We hope this brief essay stimulates your thoughts with respect to how money is created – a secret all investors should know.
Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up “out of thin air” by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) “peg” the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.
For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector’s new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to “print money out of thin air”. Central bank printing of new money is accomplished by purchasing government debt or other assets.
The Broad Measure of Money: M3
(In Billions of Dollars)
Jan 2000...6595
Jan 2001...7223
Jan 2002...8046
Jan 2003...8546
Jan 2004...8892
Jun 2004...9293
Clearly, there has been substantial money growth since 2000. Moreover, neither the crash of the NASDAQ stock market, or the last recession, has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 – reducing them to a 46 year low – has a lot to do with the massive amount of borrowing that has taken place in the United States.
Total Net Borrowing in the U.S.
(In Billions of Dollars)
2000....2001....2002....2003
1704....1974....2192....2638
The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20 percent of GDP. There has been a whole lot of borrowing and spending of new money going on!
Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt.
To say that this process has been left to run wild is an understatement.
Indeed, it’s time to think “Bubble” in stocks, bonds and housing. A rational investor understanding the credit creation process would have played the resulting upward momentum in asset prices for all they were worth!
However, the world is changing. The central banks are already printing vast quantities of new money, making 2004 a “watershed” year. In the general price level, due to the creation of new money borrowed into existence, inflation is starting to leak through.
If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes. Inflation is needed to push up cash flows to service old debt.
Without inflation, there remains a massive risk of deflation. If old debt is paid down, or forgiven in bankruptcy, money that has been previously created will vanish from whence it came. If the money and debt goes, asset prices will crumble. Many intellectual writers have logically concluded that rising interest rates will cause a “deflationary debt collapse” as interest rates rise. Certainly, a rise in interest rates to more normal levels will be painful and will cause some financial distress. Moreover, a rise in interest rates tends to slow the private money creation process. So, some questions remain unanswered. Where will enough money come from to keep the U.S. economy liquid and solvent? Where will the massive amounts of new money come from to service the debt mountain?
Let’s not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because “inflation tomorrow is better than a collapse of the financial system today”.
Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the “Great Money Printing”. In the past 12 months, global central banks have created about $800 Billion worth of new money (as measured by the increase in world central bank reserves). This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls “Helicopter Money”.
US Fed Holdings of US Treasuries...$718 Billion
US Fed Holdings of US Treasuries for Foreign Central Banks...$1.24 Trillion
Foreign Holdings of US Assets...$3.3 Trillion
Foreigners already hold almost 40 percent of marketable U.S. Treasury debt. The Asian central banks have increased their holdings of U.S. assets to about $1 Trillion. In the relay race of money creation, 2004 is the year when the baton of money creation has already been handed from the private sector to the world’s central banks!
Wide open money spigots in the private economy have a habit of financing “asset price bubbles”. Since the prices of bubble assets (stocks, bonds and housing) are not included in the price indexes that measure inflation, the inflationary consequences of new money growth can be ignored. As central banks inject money growth directly into their respective economies by buying assets such as United States treasury bonds with Helicopter Money, it is impossible to totally conceal the fact that there is more money chasing the same number of goods. Inflation happens!
The massive trade and budget deficits in our country have acted as an “excuse” for friendly foreign central banks to do much of the needed money printing that would normally be done by the Federal Reserve. Our trade deficit gives companies in foreign countries dollars in exchange for their exports. Our treasury deficit gives foreigners the opportunity to buy our U.S. treasury debt with the dollars. Any foreign central bank can then swap their local currency with companies holding dollars and buy U.S. treasury debt! It’s all so simple! New money has been created, just not in our country!
For instance, the Central Bank of China is creating new money by buying U.S. treasuries with our trade deficit. This has helped to drive up their domestic inflation rate to 5 percent a year!
Until just recently, even the Japanese have been suffering from mild deflation and may not have the economic capacity to buy unlimited quantities of our treasuries. Japan is already flooding their economy with fresh Yen out of thin air, as they finance their own government deficit. Japan is currently running a 7–8 percent fiscal deficit and their savings rate has been dropping. Japan’s national debt is 140% of GDP and is rising rapidly. The Japanese bond market faces a serious risk of price collapse as their interest rates start to rise. Therefore, Japan can not be counted on to finance both their government deficit and our deficit for much longer.
Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor’s central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood’s America with Helicopter Money by buying massive amounts of U.S. Treasuries.
As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market’s friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down!
Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.
Cash in a safety deposit box anyone...?
After reading these first two articles, maybe holding cash in a safety deposit box makes sense... A potential problem with cash in banks and brokerage accounts is your money is simply electronic debits and credits... Maybe cash in your safety deposit box makes as much sense as holding gold and silver in your box... Maybe Bob Prechter is right... YIKES!!
But be sure to read final article below, Paul Van Eeden's view seems more realistic to me...
While defaults and asset sales are deflationary, and hence increase the value of the dollar inside the US, I find it hard to believe that foreign investors are going to fall over themselves to snap up more US stocks and bonds. Imagine: falling asset prices, rising interest rates and a contracting economy. Under those circumstances why would foreign investors want to invest in the US? If the US loses its appeal to foreign investors the demand for dollars on foreign exchange markets will decline, and the dollar will weaken against other currencies.
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Richard Russell
July 28, 2004
As you know, the debt situation in the US is of massive proportions. I don't believe that the US debt "mountain" could hold up against a new down-leg in the bear market. I said a few months ago that I thought the tower of debt that has been built in the US constitutes a synthetic short position against the dollar.
What I mean is that it takes tens of billions of dollars to carry the current $32 trillion dollars of US debt (debt in all areas from housing to corporate debt to consumer credit card debt). With the stock market breaking down, there's got to be pressure on debt. Debtors need dollars to keep solvent. If they don't have the dollars, they've got to find them somewhere. They're in the position of being SHORT of dollars. That may be the beginning of what we're seeing now as the dollars climbs higher and higher.
At the same time, the currencies are breaking down. The Swissie, often the leader, plunged below its 50-day moving average three days ago. Today the Swiss franc dropped below its 200-day MA. As I said, the Swissie often leads the other currencies.
The euro today broke below both its 50-day and 200-day MAs.
The yen today broke below its 50-day MA -- it already has broken below its 200-day MA.
What this all means is that we could be facing the ultimate in the unexpected -- the beginning of a panic for cash, liquidity, dollars.
I don't know how many of my subscribers have read the book that I recommended, "Balance Sheet Recession" by the brilliant Richard Koo. If you did read the book you know that the problem is NOT ENOUGH SPENDING, and DEFICITS THAT ARE NOT BIG ENOUGH.
And yes, that concept is totally counter-intuitive. You'll hear the people at the conventions shouting that we've got to cut the deficits. But to keep this economy going, the government has to spend more! It has to run up even bigger deficits.
And you I'll tell you something -- the US government may spend more but it won't be enough to keep the economy going. So the ultimate irony is materializing -- not enough spending to keep this bear market at arm's length.
Right now, aside from lousy stock market action, I believe that the currencies and the strong dollar is telling the story. In the US, everyone is going to need dollars to ward off the "big squeeze." And when I say big squeeze, I'm talking about the "big squeeze" that has been brought on by the need for cash to carry the debt.
Unfortunately, the rush for dollars is putting pressure on gold. Gold's time has not yet come. But it will. There's no easy way to time the move in gold. It will come suddenly, and violently, as faith in paper collapses. Gold is the insurance we have to have, and I honestly don't attempt to time it. I just want to own a certain portion of gold, and that's it. This whole economic situation is far bigger than just walking away with some stock market profits.
By the way, I also believe that housing is very vulnerable. Generational low interest rates have moved two-thirds of American families into their own homes. It's a bubble waiting to burst. People don't realize that when they buy a house it's going to cost them 10 percent a year to carry that house.
I see people here in Southern California buying one million, two million and three million dollar homes. These people don't realize that it's going to cost them in the hundreds of thousands of dollars to carry these million-dollar homes. In the end, many of these "good-time buyers" will lose their homes. The housing bubble will burst, and the homes that people stood in line to buy -- will be a drug on the market.
www.dowtheoryletters.com
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http://worldmarket.blogspot.com/2004/07/which-flation.html
Thursday, July 29, 2004
which flation?
during his recent testimony on the hill, Alan Greenspan , when questioned by Ron Paul about the Fed's money printing, averred that today's fiat systems 'do a very good job of replicating a gold standard, and are not inherently inflationary as i had previously thought'. as proof of this assertion Greenspan mentioned Japan's experience of the 90's, which showed that deflation is possible in a fiat system - something which he thought was impossible previously.
well, this is a sort of 'yes and no' proposition. on the one hand, the assertion that 'fiat systems are good at replicating a gold standard' can be disproven without much ado. the Federal Reserve has been an engine of inflation from the moment it was founded. as Greenspan himself admitted in another q&a, in spite of a few ups and downs during the 19th century (for instance, the civil war inflation, which was followed by a period of mild deflation), prices in the US remained by and large STABLE from the beginning of the 19th century until 1913, the year the Fed as well as the income tax came to life.
contrary to that experience, it now takes 1,900 dollars to buy what 100 dollars bought in 1913. thus, the fiat system has done a very poor job indeed of 'replicating a gold standard' with regards to the most inportant feature of same, stable prices over a very long period of time.
long term US CPI: http://www.northerntrust.com/library/econ_research/weekly/us/images/030801_01.gif
on the other hand, Greenspan does have a point about Japan. Japan's experience has not been deflationary in the classical sense, insofar as Japan's aggregate money supply has risen every single year during the 90's. however, prices have certainly declined (in some instances sharply) during this time, and outstanding bank credit at one point had contracted for 58 months in a row.
so what had happened? the BoJ after all did everything it could to instigate inflation. it dropped rates to zero, and pushed money into the system with abandon, most recently with its 'quantitative easing' policy that entails even the (allegedly temporary) monetization of stocks.
it stands to reason that Japan's experience holds vital clues as to the possibility of deflation in a fiat dispensation.
but first let's look at some recent commentary on the issue. a curious little news item crossed my desk not too long ago:
"According to a monthly survey conducted by Merrill Lynch, a net 78% of fund managers expect global core inflation to be higher a year from now. "
as we all know, such a broad consensus usually turns out to be wrong. indeed, if one looks at positioning data in debt futures instruments, one notices that this consensus is extremely widespread. speculative net short positions in US bonds and notes futures have reached several consecutive record highs this year, and the Rydex bond ratio (the ratio of assets deployed between the Rydex short and long bond funds) at one point reached an incredible 120 points, which amounts to a bearish consensus of well over 99% (it has since retreated to a less conspicuous 27, but that's still 27 dollars invested short for every dollar invested long). the contrarian conclusion from all this is that in spite of the CRB index scaling mutli-year highs, the inflationists (i.e., the by now relatively large contingent of market participants expecting a replay of the 70's stagflation) are probably wrong.
two of the most eloquent proponents of the inflationists have in recent weeks presented their views on the issue; they are Steven Saville (who btw. frequently points out that he does NOT expect a replay of the 70's, but nevertheless expects inflation to accelerate appreciably in coming years) and Ed Bugos. both are adherents of the Austrian School, which is probably why they are so determined on the inflation issue - most Austrians are of the opinion that the Fed can inflate at will (see also Gary North and Sean Corrigan), and this is true in principle. but you can probably guess that i have some objections.
Saville: http://news.goldseek.com/SpeculativeInvestor/1084893010.php
Bugos (criticizing Richard Russell for daring to even contemplate deflation): http://news.goldseek.com/GoldenBar/1088099734.php
Saville quotes Corrigan in support of the thesis that deflation is highly unlikely (to his credit, he doesn't rule out the possibility completely) - as evidence, the Fed's willingness to flood the system with credit at every opportunity (in both real and imagined crises) is cited. the evidence is indeed damning - the Fed DOES open the spigot at every available opportunity, and as Doug Noland of prudentbear has chronicled, is usually helped in these endeavors by the GSEs via expansion of their balance sheets.
however, this does not address the major argument in favor of an eventual deflationary outcome: namely the fact that these past goosings of credit have added up to what is now a grand total of approximately 360% of GDP in total credit market debt, leaving the previous historic record of 1929 (260% of GDP) in the dust. the point here is that the debt has become so large, that the authorities, and of course the debtors, would like nothing better than inflating it away - but as Bill Bonner has so sagely remarked, people sometimes don't get what they want, but what they deserve. in order to 'inflate debt away' in the current fiat money system, the new money has to be 'borrowed into existence'. in other words, the inflation depends on expanding this astonishing debt mountain even further. the central bank's modus operandi dictates how this is done - in the US via the short term interest rates the Fed controls, the monetization of government debt (and to a smaller extent, since 2000 also GSE debt) and tinkering with free reserves in the banking system.
Bugos has a very good point when he alleges, as he frequently does, that the Fed wants everybody to believe that there is no inflation in order to be able to inflate all the more. after all, if the market became convinced that the Fed is indeed successfully inflating, it would drive up interest rates to levels that would act as a very effective counterweight to the inflation attempt. the Fed's scheme to inflate works only as long as most market participants believe the rate of inflation is tame.
but it seems from Japan's experience, that it is NOT as Bugos likewise says , the central bank alone that determines the degree of inflation. in a widespread credit collapse such as that of the 1930's US or 1990's Japan, the central banks traditional methods of goosing inflation tend to fail (it could alternatively adopt a modus operandi that is explicitly designed to destroy the currency it issues). neither the 30's Fed, nor the 90's BoJ were shy about boosting free bank reserves or monetizing government debt. but the banks, for lack of trustworthy debtors, turned around and re-invested the reserves freed up by selling government bonds to the central bank into more government bonds, or occasionally, as was observed in Japan, the money market would simply be awash in liquidity that nobody wanted.
thus, while Japan's money supply still rose (due to the the government's debt issuance spree counter-acting the plunge in private sector bank credit) , the velocity of money declined sharply.
Bugos is correct that the term 'overinvestment' is misguided, and the appropriate term is 'malinvestment' - economic activities that are per se, not wealth-generating, and would never spring up in a truly free market to the extent that they do in a fiat money regime (this is not to say that no entrepreneurial errors occur in a truly free market, only that there are far fewer of them, and those that do occur are corrected more quickly).
such malinvestments are on the artificial life support of money created out of thin air - when the expansion of credit slows down, or reverses, these activities collapse.
usually, a tightening of credit (often on the belated realization that a credit boom has gotten out of hand) by the central bank becomes the proximate cause, although i suspect that a credit boom can eventually become exhausted even in the absence of such a tightening.
on this point, the Austrian scholar Frank Schostak writes:
"As long as the pool of real funding is expanding and banks are eager to expand credit (credit out of "thin air") various nonproductive activities continue to prosper. Whenever the extensive creation of credit out of "thin air" lifts the pace of real-wealth consumption above the pace of real-wealth production the flow of real savings is arrested and a decline in the pool of real funding is set in motion. Consequently, the performance of various activities starts to deteriorate and banks' bad loans start to rise. In response to this, banks curtail their lending activities and this in turn sets in motion a decline in the money stock. "
and further:
"How is it possible that lenders can generate credit out "of thin air" which in turn can lead to the disappearance of money? Now, when loaned money is fully backed up by savings, on the day of the loan's maturity it is returned to the original lender. Thus, Bob—the borrower of $100—will pay back on the maturity date the borrowed sum plus interest. The bank in turn will pass to Joe, the lender, his $100 plus interest adjusted for bank fees. To put it briefly, the money makes a full circle and goes back to the original lender.
In contrast, when credit is created out of "thin air" and returned on the maturity day to the bank this amounts to a withdrawal of money from the economy, i.e, to a decline in the money stock. The reason for this is because there wasn't any original saver/lender, since this credit was created out of "thin air." "
Shostak's article ("Does a falling money stock cause economic depression?" - an excellent article with many charts depicting the 30's depression's macroecnomic and monetary data - which prove, beyond a shadow of doubt, that the Fed was priming the pump madly at the time, contrary to popular mainstream economic misconceptions. but it didn't work - a deflation of both the money stock and bank credit, as well as a vicious price deflation ensued. note that prices at one point registered an aggregate annual decline of over 10%). as an added bonus, there's a chart detailing the change in the BoJ's holdings of government securities during the 1990's - which contradicts Saville's contention that Japan relied 'mostly on fiscal deficit spending' as opposed to monetary pumping. it relied in fact on both.
http://www.mises.org/fullstory.aspx?control=1211
so there you have it. deflation as a side effect of the liquidation of malinvestments when an artificial credit induced boom in a fiat regime falters - with the proviso that the pool of real funding is in decline, since as long as the pool of real funding still expands, the central bank's 'reflation' measures will APPEAR to re-ignite the boom.
what about the pool of real funding in the US? how can we ascertain whether it is or isn't in trouble? one of the yardsticks used by Shostak to illustrate the likelihood of trouble looming is the personal income-to-outlays ratio, which as he notes, has declined more steeply during the last 24 years of Fed accommodation than it ever did during the 1920's and 1930's.
furthermore, one of the strongest hints we have is how the stock market behaved after the year 2000 Nasdaq bubble peak - for the first time since the 1930s, the stock market has failed to regain the level it inhabited at the time the Fed began its rate cutting campaign. since the stock market is a mirror of perceptions about economic reality, this failure must be counted as a sign that the pool of real funding is in trouble. note in this context that in Japan likewise, the stock market has given this very same signal after the 80's bubble peak there.
what else do we know? we know that the Fed's 'reflation' strategy has had both intended and unintended consequences, all of which are symptomatic of the very basic conditions that eventually lead to a decline in the pool of real funding.
Shostak:
"Whenever the extensive creation of credit out of "thin air" lifts the pace of real-wealth consumption above the pace of real-wealth production the flow of real savings is arrested and a decline in the pool of real funding is set in motion."
the evidence that this has taken place is overwhelming - of note in this context is the real estate bubble (an 'intended consequence' if we take Greenspan at his word, since he has hailed the ability of consumers to 'extract housing wealth' as a salutory event for the economy), which is the ultimate in 'consumption without preceding production' or 'exchanges of nothing for something'.
it should be obvious that when the price of a house rises on account of a massive credit expansion, its value does not. it is still the same house.
another ('unintended') consequence is the relentless rise in commodity prices. this is taken as proof by the inflationists that more broad based inflation is looming ('cost push'), but as Bugos notes, an important component, namely rising wages, is at this stage conspicuously absent (this is one the major differences in terms of macro-economic data compared to the 1970's stagflation period, and while Bugos thinks rising wages are inevitable, the evidence argues otherwise. labor has no pricing power, since it is abundant in China and India, and i would argue that in spite of the rose-colored statistics published by the US BLS, it is abundant in the US as well).
the rise in commodity prices is partly a symptom of the reflation effort, which has inter alia spurred a credit boom in China, but it is also a symptom of decades of malinvestment, i.e. investment directed in the wrong direction.
the reflation attempt, by encouraging even more malinvestment , leads to demands on resources exceeding the supply of same - hence the price rises.
but are rising commodity prices really heralding broad based price inflation? this seems unlikely in view of the lack of pricing power on the part of both corporations and labor (except of course commodity producers, who are enjoying a rare bout of pricing power, but represent such a small slice of overall economic output that they can't dent the aggregate picture).
rather, the additional funds that have to be expended on raw materials are sapping both consumer's and corporations ability to shell out money on other things, such as consumer goods, capital goods and debt service.
the following article by the Hoisington Group illuminates what they refer to as the 'deflationary gap' in the US economy, by looking closely at qu. 2 2004 economic data in a longer term context. among the few bond market bulls in the current investment landscape, they argue that the Fed is not 'behind the curve' as one often hears these days, but actually 'ahead of the curve'. i fully agree with their view that the current baby step interest rate increases campaign will eventually be reversed in its entirety.
of interest from an Austrian point of view is here the continuing high level of the capital spending to GDP ratio (while factory use remains mired a full 6 percentage point BELOW the post 1949 average). it is a sign that the necessary realignment of the economy has been arrested by the combination of the Fed's monetary pumping and the government's Keynesian fiscal stimulus in the wake of the post bubble experience. the bust should have redirected resources away from capital goods to consumer goods production, but this has failed to transpire.
also of note, the expectation that money velocity will continue to decline in coming years - imo an essential symptom of a deflationary bust in a fiat regime.
Hoysington report: http://www.hoisingtonmgt.com/HIM2004Q2NP.pdf
lastly, an article by Gary North (who's ironically firmly in the inflation camp), which ponders the possibility that the 'lender of last resort' may one of these days be confronted with a crisis too big to bail - a good argument for deflation as it were. he mentions the 'interbank settlement' issue first chronicled by Warren Pollock, as well as Greenspan's famous 'cascading cross-defaults' saying on occasion of the LTCM intervention post mortem. i take his warning at the end of the article very seriously, and urge everybody to take it to heart.
Gary North ("the limits to central banking"): http://www.lewrockwell.com/north/north282.html
PS: i have several times referred to the central bank's 'modus operandi' above. this is an important point that requires to be expanded upon. one of the major arguments in favor of stagflation is that the Fed (and presumably other central banks as well) will do 'whatever it takes' to avert deflation.
famously, Ben Bernanke , saint of the printing press, has referred to the option of 'helicopter money'. he didn't mean it literally, but a literal enactment is exactly what it would take. if they DID drop money from helicopters, all the outstanding debt could be instantly monetized. the debt deflation cycle could in theory be arrested, since the urge to pay down debt, or alternatively the need to default on it, as well as the corresponding urge to save (all inherently deflationary in the fiat system) would be obviated.
however, i believe this expectation (i.e. 'they will do whatever it takes') is misplaced. granted, they would probably resort to 'unusual' measures, such as buying up government debt across the yield curve, or even monetizing stocks as the BoJ has done, or expanding the monetization of land (i.e., GSE debt) beyond temporary injections. but they would shy away from the literal helicopter for a simple reason: it would utterly destroy the currency they issue, and very likely a number of local free market monies would arise in its stead. that would mean relinquishing the very power they now wield (the power to redistribute wealth via inflation 'creep') , and i doubt that that is an option they'd consider.
a final comment: deflation is not 'bad'. what's bad about goods and services getting cheaper? in fact, mild deflation is the NATURAL order of things in a true free market economy. it is only considered 'bad' because of the fiat debt mountain that has been built up. but think about this for a moment: let us say the economy lapses back into recession - worse than before. what should those that will lose their jobs wish for? that their savings buy LESS goods and services than before, or more? true, their assets will deflate as well - but whatever they have in cash or cash like instruments can either buy less (stagflation) or more (deflation). the choice seems clear.
posted by pater tenebrarum at 8:55 PM
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Debt: a synthetic short position in the dollar
July 23, 2004
A short position is when you have sold something you don’t own. Take a stock as an example. If you borrow the stock and sell it you are short the stock. At some point you have to buy the stock in order to give back that which you borrowed. Because you will eventually have to buy the stock that you sold short, the fact that you are short means there is latent demand for the stock.
It has been said that the tremendous amount of US debt can be likened to a synthetic short position in the dollar because the debt must be repaid at some point, and repaying the debt will require dollars. This demand for dollars will then, supposedly, increase the price of dollars and strengthen the dollar on foreign exchange markets. A stronger dollar implies a lower gold price, which is why the synthetic short position in the dollar has a few gold investors worried.
Maturing debt is normally repaid by issuing new debt with no net demand for dollars and, hence, no increase in the value of the dollar. However, if the credit quality of the issuer is cast into doubt, investors may not be willing to buy the new debt -- at least not at the same price as the existing debt. Several things could then happen.
The borrower could default on the maturing debt and not repay it at all. In this case the invested money is lost causing a contraction in the money supply. Less money increases the value of the remaining money and so defaults increase the value of cash (dollars).
If the borrower sells assets to raise cash and pay off the debt the result is the same. An increase in asset sales will depress the value of assets and increase the relative value of dollars.
If the US economy was a closed system one could therefore make the case that debt represents a synthetic short in the dollar since, at some point, dollars will be needed to repay the debt when new debt cannot be issued.
But the US is part of a world economy and we have to consider not only the value of the dollar relative to US assets and labor, but also against other currencies.
The US government’s budget deficit is rapidly increasing the supply of US debt, thereby increasing interest rates. As a result of higher interest rates the US economy is likely to slow down and a slower economy in conjunction with higher interest rates can cause an increase in defaults and asset sales.
While defaults and asset sales are deflationary, and hence increase the value of the dollar inside the US, I find it hard to believe that foreign investors are going to fall over themselves to snap up more US stocks and bonds. Imagine: falling asset prices, rising interest rates and a contracting economy. Under those circumstances why would foreign investors want to invest in the US?
If the US loses its appeal to foreign investors the demand for dollars on foreign exchange markets will decline, and the dollar will weaken against other currencies.
In summary then, the dollar could appreciate within the US against assets and labor but simultaneously fall against other currencies -- leading to higher gold prices.
Most currency traders do not share my views and still see higher interest rates as positive for the dollar. The dollar strengthened this week because Alan Greenspan gave an upbeat assessment of the economy and his comments were interpreted to mean that interest rates would continue to rise gradually while any sign of inflation would be dealt with harshly.
Because the dollar strengthened the gold price declined. Until we see evidence that higher interest rates are hurting the economy the dollar will continue to strengthen as rates edge upwards. And unless the dollar weakens in the face of higher interest rates the gold price is unlikely to sustain a rally.
Paul van Eeden
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Hedge Fund Alternatives
The Hussman Funds appear to be a viable hedge fund alternative. One factor I like is Hussman has the majority of his wealth in his own funds... HSTRX appears the best:
http://www.hussman.net/theFunds.html
http://yahoo.businessweek.com/magazine/content/04_06/b3869124_mz070.htm
http://www.hussman.net/pdf/diligence.pdf
http://www.hussman.net/pdf/hstprosp.pdf
http://www.hussman.net/pdf/moneyrep.pdf
The Rydex SPhinX Fund also appears to be a viable hedge fund, but one needs to be an accredited investor... It offers a fund of hedge funds investment style.
http://www.rydexfunds.com/campaigns/sphinxoverview.cfm
Rising Interest Rate Risk
GIM has the following characteristics:
http://www.franklintempleton.com/retail/jsp_cm/corp/press/2004/tmp_port_alloc_051904.jsp
WEIGHTED AVG. MATURITY = 5 yrs.
WEIGHTED AVG. DURATION = 4.35 yrs.
WEIGHTED AVG. COUPON = 6.910%
Assuming Weighted Average Duration = Modified Duration (should be similar), then a 1% rise in global (non-USA) interest rates would cause the NAV of GIM to decrease by 4.35%. Thus for GIM NAV to rise, then foreign currencies will have to rise by more than 4.35% assuming a 1% rise in global interest rates. GIM is currently selling at a 7.92% discount to NAV, or about a 1.75% rise in expected interest rates.
I have been selling my BEGBX and buying GIM since BEGBX sells at its NAV and is not a closed end fund selling at a discount like GIM. If or when GIM sells at a premium again, then one should sell GIM and buy BEGBX.
"The duration represents the length of time for which capital is “tied-up” in a bond investment. In contrast to residual maturity calculations, the concept of duration takes account of the time structure of returning cash flows (such as coupon repayments). The average duration of the portfolio is derived from the weighted average duration of the individual securities. The “modified duration” is derived from the duration and provides a measure of the risk with which the sensitivity of bonds or bond portfolios to interest-rate changes can be estimated. A 1% increase (decrease) in the interest level accordingly produces a percentage fall (rise) in the price in proportion to the modified duration. For example: the modified duration of a bond fund is 4.5 years, the theoretical yield to maturity is 5.3%. If the yield drops by 1% to 4.3%, the fund price increases by around 4.5%. For bond and asset allocation funds, the duration is given for all fixed-income instruments."
http://www.investopedia.com/university/advancedbond/advancedbond5.asp
http://invest-faq.com/articles/bonds-duration.html
http://www.riskglossary.com/articles/duration_and_convexity.htm
http://www.moneymax.co.za/articles/displayarticlewide.asp?ArticleID=271860
Everbank Currency CD's
http://www.everbank.com/main.asp?affid=eb
Everbank Abridged Info:
With over five trillion dollars exchanging hands every day, the Foreign Exchange Market (FOREX) is the largest and most liquid market in the world. Yet, there are surprisingly few easy ways for individual investors to invest. Select from any of the major world currencies—including the Euro, Swiss franc, British pound, and many more.
Choose flexible terms and maturities—from three months to one year, with the ability to set up automatic rollover for longer-term investments. No monthly account fees, no foreign wire or draft fees. Except for U.S. dollar wires, the only costs associated with your deposits are the highly competitive conversion fees built into foreign currency prices.
*Modest Minimums—you may buy a single currency CD for any amount equivalent to U.S. $10,000 or more. For Index CDs, the minimum is $20,000.
*Access your principal and interest upon maturity by withdrawal either in the local currency via draft or wire, or convert your foreign currencies to U.S. dollars for current value.
*FDIC insured.
XGV Govt of Canada 5 Year Bond Fund ETF/iUnits
Quote & 1 Year Chart for XGV.to :
http://finance.yahoo.com/q?s=xgv.to
Fact Sheet:
http://www.iunits.com/english/funds/fundprofiles/ig5/factsheet.pdf
July 2002 article - see pages 3-4:
http://www.exchangetradedfunds.com/ETFR/July%2002.pdf
GIM Charts - Templeton Global Income Fund
Top Chart = GIM / Middle Chart = NAV of GIM / Bottom Chart GIM Premium/Discount
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