First, a personal story. In the seventies, my wife and I had rented an apartment in Ramot, Jerusalem using the last of our funds. I had finally found a job with Bank Hapoalim in Ramat Eshkol. It was winter in Jerusalem, cold and raining. My only pair of "good" shoes were worn and walking to the bank, water seeped through the holes and made my day miserable. So what does one do in a situation like this? I wrote my father who at the time was farming in Zululand, South Africa and explained my circumstance, requesting a loan at any interest rate. He wrote back "Harry, the young Africans on the farm are running around barefoot. Work it out. Too bad, so sad, Your Dad." Believe it! That was my first lesson in fiscal responsibility, and I have never forgotten it. Love you Dad.
The evils of compound Interest - A SUPER INDICATOR
The SUPER Indicator: If you want to know when to really worry, Watch US bond yields. When they start to rise it will indicate the beginning of the end of this long term bull market.
To make it simple, a household earns $100,000 p.a. They owe the banks, credit card companies and mortgage broker a combined amount of $100,000. The average interest on these loans is 3%p.a. The household income is used to pay interest, food, mortgage and other living expenses. Every year our household renews the debt by approaching the creditors and negotiating an extension for another year, except that the debt next year is $103,000 ($100,000 principle + $3000 Interest). Assuming that the household accounts are in order, the following questions need to be considered....and while we are considering, keep in mind that the household is The US situation today.
1. Can the household income (GDP) be increased by working harder and finding extra productivity? At the moment US Debt equals 100% of GDP (2011 Third quarter figures) and growing by the month. So far in 2011 Real GDP growth is about 1.5%-2%.
2.Should we increase our debt to try and keep afloat, in the hope that conditions improve in the the future or should we cut back and try and live within our means?
3.Should we devalue our means of payment so that we repay our debts with devalued dollars, further enraging our creditors. For the record, a single household cannot do this, but the US government can. The risk is that the paper money loses all its value.
4.And of course, the $64,000 question. Will our creditors continue to renew our loans. Or will they approach us and say that they are aware of our household figures and that since we don't appear to be doing anything about curbing the debt, they will only renew the debt at 4% p.a. or even higher. The consequences are obvious.
The US Treasury (Our household) raises funds by issuing Treasury Bills in the hope that there is strong enough demand to keep interest rates steady. So the yield (the effective interest rate) on US treasuries is a critical indicator. The situation in Europe is slowly spiralling out of hand, with governments raising funds at about 7% p.a. and most European government debt is well above GDP and compounding.
The slowdown in emerging markets is not helping the situation. So as we move into 2012, it might pay to remember that hundreds of millions of people are without shoes.
Life is uncertain. Eat dessert first - Ernestine Ulmer
Don't believe the world owes you a living; the world owes you nothing--it was here first - Robert Burdette
Friday, December 30, 2011
Monday, December 12, 2011
KISS News
1. It looks like Vladimir Putin is reacting to US criticism of what he considers interference in "Russian internal affairs". He has adopted an almost pro-Iran, pro-Syria position at the UN and to top it off, much to the discomfort of Washington, Russia and Venezuela are developing an ever cosier bilateral relationship. Russia’s state-run oil giant Rosneft announced a $2.6bn deal today to develop Venezuela’s extra-heavy crude oil reserves in the Orinoco.
2.FT: Is Turkey heading for a hard landing? That seems a strange question to ask on the day it reported growth of a thundering 8.2 per cent in the third quarter year-on-year. But domestic demand growth contracted sharply at a time when export markets are about to face big hit. With the central bank in tightening mode as it struggles to finance the world’s second biggest current account deficit, Turkey has its work cut out.
3.For anyone bummed out about the United States' dependence on foreign oil, try this forecast on for size: The U.S. is on track to be a net exporter of petroleum products this year for the first time in 62 years -- and yet, domestic gas prices remain at or close to record highs for this time of year. The reason? To put it simply, Americans are relying on less, while emerging markets are demanding more. Tom Kloza, chief oil analyst at the Oil Price Information Service: “Instead of that product backing up and depressing prices, it’s being sent to other countries,”
4.Central banks are ramping up their gold buying as they seek to diversify their reserves away from the dollar and other beleaguered currencies. South Korea bought gold for the first time in 13 years, the latest central bank seeking to reduce dependence on the U.S. dollar. South Korea became the latest government to disclose a big bullion purchase, saying Tuesday that it recently bought 25 metric tons - more than doubling its holdings to 39 metric tons. Mexico, Russia and Thailand have also been major buyers in 2011.
5.For the second time in less than a month, the Indian rupee has hit an all-time low against the dollar, at Rs 52.885. The flagging currency’s low point came soon after the release of data revealing that industrial production had contracted a staggering 5.1 per cent in October. The rupee is Asia’s worst performing currency this year, having depreciated around 15 per cent since July amid a faltering Indian economy beset by persistently high inflation, and widening trade, fiscal and current account deficits, and foreign outflows.
6.Latvia's largest bank is scrambling to contain a run among depositors gripped by fears of the bank's imminent collapse. The panic among Swedish-owned Swedbank's depositors began Sunday after rumors spread that the financial institution was facing legal and liquidity problems in Estonia and Sweden.Swedbank's Latvian chief Maris Mancinskis on Monday called the rumors "absurd." COMMENT: What else could he say.....
COMMENT: Looks like all the BRIC (Brazil, Russia, India, China) countries are struggling. Adding that to Europe and the US debt paralysis, does not bode well for the world economy. Despite all this the markets do not appear to be unduly worried. Keep an eye on the Shanghai Stock Exchange, struggling to hold in the 2300 support area. At the end of the day the economic world is a great big melting pot.
TECHNICAL COMMENT: The DOW now on a third attempt to break up past the 12200 resistance area. Failing this we can expect a sharp downturn. Strong support area at 10000-10500.
Have a great week
2.FT: Is Turkey heading for a hard landing? That seems a strange question to ask on the day it reported growth of a thundering 8.2 per cent in the third quarter year-on-year. But domestic demand growth contracted sharply at a time when export markets are about to face big hit. With the central bank in tightening mode as it struggles to finance the world’s second biggest current account deficit, Turkey has its work cut out.
4.Central banks are ramping up their gold buying as they seek to diversify their reserves away from the dollar and other beleaguered currencies. South Korea bought gold for the first time in 13 years, the latest central bank seeking to reduce dependence on the U.S. dollar. South Korea became the latest government to disclose a big bullion purchase, saying Tuesday that it recently bought 25 metric tons - more than doubling its holdings to 39 metric tons. Mexico, Russia and Thailand have also been major buyers in 2011.
5.For the second time in less than a month, the Indian rupee has hit an all-time low against the dollar, at Rs 52.885. The flagging currency’s low point came soon after the release of data revealing that industrial production had contracted a staggering 5.1 per cent in October. The rupee is Asia’s worst performing currency this year, having depreciated around 15 per cent since July amid a faltering Indian economy beset by persistently high inflation, and widening trade, fiscal and current account deficits, and foreign outflows.
6.Latvia's largest bank is scrambling to contain a run among depositors gripped by fears of the bank's imminent collapse. The panic among Swedish-owned Swedbank's depositors began Sunday after rumors spread that the financial institution was facing legal and liquidity problems in Estonia and Sweden.Swedbank's Latvian chief Maris Mancinskis on Monday called the rumors "absurd." COMMENT: What else could he say.....
COMMENT: Looks like all the BRIC (Brazil, Russia, India, China) countries are struggling. Adding that to Europe and the US debt paralysis, does not bode well for the world economy. Despite all this the markets do not appear to be unduly worried. Keep an eye on the Shanghai Stock Exchange, struggling to hold in the 2300 support area. At the end of the day the economic world is a great big melting pot.
TECHNICAL COMMENT: The DOW now on a third attempt to break up past the 12200 resistance area. Failing this we can expect a sharp downturn. Strong support area at 10000-10500.
Wednesday, December 7, 2011
KISS News
1.Italian bond yields continue to climb to new euro-era records, with bonds sold within the past few days going at 7.89 percent — a level at which Greece, Ireland and Portugal were all forced to seek bailouts. Italy has a stronger financial position and more domestic capital than the eurozone’s three bailout states, but there is still an upper limit to what Rome can afford and the markets are pushing Italy ever closer to a break point. FACT: Italy's debt is 120% of GDP. Its unserviceable. Simply put, for every 100 lira of goods and services produced, it costs 120 Lira of debt to produce it. Italian debt is growing at 20%p.a. more than Italy produces per annum.
COMMENT: Despite the latest co-ordinated move from Central banks, Europe is not out of the water yet. In fact, the latest central bank moves indicate how dire the situation might really be.
2. A year ago Egypt's foreign currency reserves stood at $35 billion. In January of 2012 they are expected to be $15 billion of which $5 billion are earmarked for foreign debt payments. These reserves are used mainly to purchase food (mainly wheat and corn), weapons and other commodities on world markets. A major income earner for the Egyptians is tourism, so don't look for improvements in the balance sheet any time soon. P.S. What happened to the billions in aid Obama and Hillary announced in May?
COMMENT: The Islamic Spring doesn't seem to be working for them, elections and all. Expect the Egyptian pound to be devalued sooner rather than later.
3.FT: China began serious easing last Wednesday as fears of a slowdown forced it to cut its reserve requirement ratios (RRRs) for all banks by 50 basis points. However Fitch, the ratings agency, argues that such a small cut will have no meaningful impact on credit expansion. Even more worryingly, Fitch raises serious concerns about Chinese banks’ liquidity levels and says their ability to weather a coming storm of asset deterioration really isn’t what it should be. As such a ratings revision could be on the cards.
COMMENT:The Shanghai market index peaked at 5900 in 2007 and is now trading at 2325. Thats quite a fall. If you ask me, the slowdown in China is far more significant than the European crisis.
4.Economic growth in Brazil slowed to zero in the third quarter of 2011 from the second quarter, according to the country’s statistics institute. Compared with the third quarter of 2010, the economy grew by 2.1 per cent. Even more significantly, In the third quarter of 2010, the economy was growing at 6.9 per cent year on year.
COMMENT: So now we have a slowdown in both China and Brazil
5.Syria struck out at Turkey in response to Turkish sanctions by imposing 30% tariffs on Turkish imports. This will bring trade to a standstill between the two countries that had expanded their trade to well over 2 billion dollars a year. The Syrian Pound has lost 25% of its value since March.
COMMENT: Expect the same from other currencies affected by the Islamic Spring. This might look like springtime for the countries involved, but financially they are on the verge of implosion.
6. When Warren Buffett talks, investors listen. And today's revelation that Berkshire Hathaway subsidiary MidAmerican Energy Holdings is buying the 550 MW solar power plant being built by First Solar should have every energy investor's ears perking up. The project will cost over $2 billion, no chump change even for Buffett, and adds to MidAmerican's large portfolio of wind generation assets.
COMMENT: The huge oversupply of solar panels, compounded by cheaper Chinese prices has led to a big selloff in the shares prices (40%-60%) of these companies. So when the stress peaks and the risk appears to be high, guess who turns up for the long-term investment. Say what you want about this guy, he deserves to belong to the one percent.
MARKETS: The Dow is trading quietly at the top of the 10000-12200 range. No jump in volumes to indicate a breakthrough (yet). The USD, Gold, oil and Dr copper are all in their trading ranges, so nothing much to report. So despite all of the above, its all quiet on the western front. Others might describe it as the quiet before the storm.
You cannot help men permanently by doing for them what they could and should be do for themselves - Abraham Lincoln
COMMENT: Despite the latest co-ordinated move from Central banks, Europe is not out of the water yet. In fact, the latest central bank moves indicate how dire the situation might really be.
2. A year ago Egypt's foreign currency reserves stood at $35 billion. In January of 2012 they are expected to be $15 billion of which $5 billion are earmarked for foreign debt payments. These reserves are used mainly to purchase food (mainly wheat and corn), weapons and other commodities on world markets. A major income earner for the Egyptians is tourism, so don't look for improvements in the balance sheet any time soon. P.S. What happened to the billions in aid Obama and Hillary announced in May?
COMMENT: The Islamic Spring doesn't seem to be working for them, elections and all. Expect the Egyptian pound to be devalued sooner rather than later.
3.FT: China began serious easing last Wednesday as fears of a slowdown forced it to cut its reserve requirement ratios (RRRs) for all banks by 50 basis points. However Fitch, the ratings agency, argues that such a small cut will have no meaningful impact on credit expansion. Even more worryingly, Fitch raises serious concerns about Chinese banks’ liquidity levels and says their ability to weather a coming storm of asset deterioration really isn’t what it should be. As such a ratings revision could be on the cards.
COMMENT:The Shanghai market index peaked at 5900 in 2007 and is now trading at 2325. Thats quite a fall. If you ask me, the slowdown in China is far more significant than the European crisis.
4.Economic growth in Brazil slowed to zero in the third quarter of 2011 from the second quarter, according to the country’s statistics institute. Compared with the third quarter of 2010, the economy grew by 2.1 per cent. Even more significantly, In the third quarter of 2010, the economy was growing at 6.9 per cent year on year.
COMMENT: So now we have a slowdown in both China and Brazil
5.Syria struck out at Turkey in response to Turkish sanctions by imposing 30% tariffs on Turkish imports. This will bring trade to a standstill between the two countries that had expanded their trade to well over 2 billion dollars a year. The Syrian Pound has lost 25% of its value since March.
COMMENT: Expect the same from other currencies affected by the Islamic Spring. This might look like springtime for the countries involved, but financially they are on the verge of implosion.
6. When Warren Buffett talks, investors listen. And today's revelation that Berkshire Hathaway subsidiary MidAmerican Energy Holdings is buying the 550 MW solar power plant being built by First Solar should have every energy investor's ears perking up. The project will cost over $2 billion, no chump change even for Buffett, and adds to MidAmerican's large portfolio of wind generation assets.
COMMENT: The huge oversupply of solar panels, compounded by cheaper Chinese prices has led to a big selloff in the shares prices (40%-60%) of these companies. So when the stress peaks and the risk appears to be high, guess who turns up for the long-term investment. Say what you want about this guy, he deserves to belong to the one percent.
MARKETS: The Dow is trading quietly at the top of the 10000-12200 range. No jump in volumes to indicate a breakthrough (yet). The USD, Gold, oil and Dr copper are all in their trading ranges, so nothing much to report. So despite all of the above, its all quiet on the western front. Others might describe it as the quiet before the storm.
You cannot help men permanently by doing for them what they could and should be do for themselves - Abraham Lincoln
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