Economist Steven Keen on BBC’s “Hard Talk”

Economist Steven Keen, the “Merchant of Gloom” discusses how we are already in a depression and how to fix the current global financial crisis. While the BBC reporter Sarah Montague states he’s one of the few people who has been discussing the current global financial crisis and how to solve it (basically writing down the debt, paying debt down, bankruptcies, etc.), I amongst a few others have been espousing such a veiw for a few years now.

Regardless, while its a bit of long interview, I certainly recommend watching it.

http://www.youtube.com/watch?feature=player_embedded&v=rGkmgnprrIU

S&P Downgrades U.S. Debt from AAA to AA+

I’ve been stating for quite sometime (see my other blogs) that its only a matter of time before the United States gets a downgrade of its debt. There was no way that the spiraling out of control debt with a decrease in revenues wasn’t going to affect its ratings. This has long-term ramifications for the U.S. Govt. (such as borrowing, etc.) It MUST cut expenses and increase revenues. With the potential of the United States heading towards a “double-dip” recession, the outlook isn’t too positive.

It will be interesting to see how this affects the various markets next week. As I mentioned in my previous blog, the markets now have a “bearish tone” to them. I will be somewhat (though not completely) surprised if the U.S. equities market doesn’t decline. I also expect other currencies to appreciate against the U.S. Dollar. Of course, only time will tell what will happen.

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“One of the top credit rating agencies, Standard & Poor’s, has downgraded the United States’ top-notch AAA rating for the first time ever. S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits”.

http://www.bbc.co.uk/news/world-us-canada-14428930

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“”The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,”"

http://www.marketwatch.com/story/us-loses-triple-a-rating-from-sp-2011-08-05

 

Markets Are Unstable(with charts)

Unfortunately I didn’t have time to make some postings a week ago while the Dow Jones was >12,000. Today (August 04, 2011), we are seeing a >200-300 point drop in the Dow Jones Industrials. Fortunately I did take a couple of “snapshots” last week of the Dow Jones Industrials and S&P 500 (@YM & @ES respectively) prior to the current plunge.

These are basic “technical” charts. I have put montly/weekly/daily charts thus one gets the long/mid/short-term “pictures” respectively.  Looking at the Dow Jones Industrails (@YM), we see multiple tops – even possibly a “double top”. There has been a lot of resistance around the 12,700 in the Dow Jones Industrials and around 1370 on the S&P 500. Notice how the MACD (differential) on the monthly and weekly chart has gone negative while the MACD (differential) on the daily chart is starting to “roll-over” as well. Are we in a “bear market”? Possibly, however notice how the moving averages haven’t “crossed-under”, especially on the montly and weekly charts.*

*-Of note, as of August 04, 2011, the Dow Jones Industrials and S&P 500 have moved below its 200 exponential moving average (they were below the 200-EMA as of August 02, 2011). This is quite bearish for the markets.

Federal Reserve Balance Sheet and S&P Outlook to “Downgrade”:

Today I’m focusing more on the Federal Reserve Balance Sheet as that is part of the reason as to why S&P put the United States debt to “outlook negative” (see previous blogs on this).

One can use various sources to see what the balance sheet of where the Federal Reserve has gone and where it is going.

Using this Wikipedia source:
http://en.wikipedia.org/wiki/Federal_Reserve_System

We know that as of November 7, 2010,  the Federal Reserve’s “Total assets” stood at $2340.44 billion (=$2.34 trillion) U.S. dollars.

From the Federal Reserves own website, as of April 21, 2011, we know that the Federal Reserve’s “Total assets” is now at $2,730 billion U.S. Dollars.

http://www.federalreserve.gov/releases/h41/current/

This is an increase of $400 billion dollars in 6 months! The increase is a mix in purchase of Treasuries, etc.

It’s the continuous and unabated purchasing of Treasuries which have many concerned that the Fed is basically devaluing its currency and this is part of the reason why S&P has put U.S. debt in “negative watch”.

While this is supposedly supposed to help the economy (click on the link by the Bank of England as to how this works), it also causes many problems as well.

http://www.bankofengland.co.uk/education/inflation/qe/video.htm

1) It causes “malinvestments” as the “cheap money” has to go somewhere to find a better return-which is usually the stock market, commodities market, etc. (again, click on the video as to why the money issued by the Federal Reserve needs to “go somewhere”).
2) It causes debasement of the underlying currency (in this case, the U.S. dollar). There is a reason as to why the U.S. dollar has performed so poorly against other currencies such as the Japanese Yen or Eurodollar. This is in spite of the fact Japan has its own set of unfortunate problems and also in spite of the fact many European countries such as Greece, Portugal, Spain and Ireland have their own fiscal problems.
3) It can cause a rapid (and many times uncontrollable) increase in inflation.

Supposedly the Federal Reserve is going to be ending its “QE2″ (“Quantitative Easing”) policy in June. What we don’t know however is what will happen (i.e.-”outcome”) when that does happen. Will stocks go down? Will commodities go down? Will the U.S. dollar start to appreciate in value against other currencies?

What we do know however is that the current U.S.economy is fragile and that there is a chance that if the U.S. economy goes back into a recession, the Federal Reserve will have to once again “turn the money spigot” on once again. This is what one of the fears and concerns of S&P in downgrading their outlook is (along with the fact they fear that the U.S. Govt. can’t get its “house in order”).

As I’ve mentioned in my previous blog, many countries are concerned about their U.S. dollar holdings (fearing it will depreciate even more-i.e.lose more value) and have at least started to either look, or have started to do business in other currencies.

FT: “China signals unease after S&P warning”

“China’s foreign ministry on Tuesday urged Washington to protect investors in its debt……According to US data, China held $1,154.1bn in US Treasuries at the end of February, making it the largest foreign holder of US debt ahead of Japan’s $890.3bn. The Federal Reserve is the largest overall holder of US Treasuries with $1,368bn on its books. “

“Lorenzo Bini-Smaghi, a European Central Bank policymaker, said on Tuesday that S&P’s warning showed the US must move quickly towards more restrictive economic and monetary policy now that its recovery was seen to be gaining in strength.”

http://www.ft.com/cms/s/0/46728a90-6a35-11e0-86e4-00144feab49a.html#axzz1K3tVPLFH

China isn’t happy and is the second larest U.S. Debt holder. Japan, the third largest US. debt holder has its own set of unfortunate problems. The largest holder of U.S. Debt, the Federal Reserve is basically devaluing its own currency. Meanwhile the U.S. Govt. can’t reign in debt/expenses and many countries are trying to do more non-U.S. dollar-based business . Gold has hit an all-time high of $1,500/ounce. Silver has hit a 30 year high of almost $45/ounce. I’ve been saying for a long time that the U.S. Government MUST reign in debt, raise revenues and get its financial house in order otherwise I don’t see how all of this bodes well for the U.S. Dollar nor the U.S. economy in general.

FT:”Singapore aims to be renminbi hub “

“Singapore has made a bid to become the first overseas hub for trading renminbi, marking a new stage in the internationalisation of the Chinese currency…….

……The People’s Bank of China, which declined to comment on the Singapore plans, is pushing for a greater role for the renminbi in global trade and investment so that China can reduce its almost total reliance on the US dollar.”

http://www.ft.com/cms/s/0/64bac520-6a4f-11e0-a464-00144feab49a.html#axzz1K3tVPLFH

While not a “mass movement” by countries to move away from the U.S. Dollar as the base currency, we are seeing small moves by countries wanting to move away from the U.S. Dollar as the base (reserve) currency-or at the very least, countries wanting to do some business in other currencies besides the U.S. Dollar. This policy will not change until the U.S. Govt decides to get its fiscal house in order.  This also reflect the lack of confidence many countries have in the ability of the U.S. Govt. to reign in deficits.

The Street: “U.S. Reportedly Plans to Unload GM Stake” (at a probable loss)

I think many of us knew this was coming. According to CNBC, GM would need to sell its 500 million shares at $53/share to break even. Given that GM is trading today at $29.41/share, I highly doubt the Government will be able to recuperate its investment.

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“WASHINGTON (TheStreet) — The U.S. government plans to sell a significant part of its remaining stake in General Motors (GM_) this summer despite the disappointing performance of the stock, people familiar with the matter told The Wall Street Journal.

At Monday’s price, taxpayers would lose more than $11 billion on the rescue if the government sold the rest of its stake now, the Journal said.”

http://www.thestreet.com/story/11086419/1/us-reportedly-plans-to-unload-gm-stake.html

Financial Times: “S&P says US debt outlook “negative””

 http://www.ft.com/cms/s/0/caa34706-6976-11e0-9040-00144feab49a.html#ixzz1JskjHv8R

“Monday 14:30 BST. MARKET SNAPSHOT Sovereign debt fears are roiling global markets. News that S&P had revised its credit rating outlook for the United States to negative has caused stock futures to plunge, Treasury yields to move higher and gold to jump to a new record just shy of $1,500 an ounce.”

I’m posting this twice (and possibly more) because this IS big news. As I mentioned before, it affects multiple markets and it affects how the U.S. Government borrows money, etc.

I’m not surprised that the gold market is up as well. That being said, while I’m a long-term gold bull,  unless there is more major market upheaval, I don’t see gold going up too much more.  I also expect to see a pullback of gold from its all-time high.

CBS Marketwatch.com- “S&P cuts U.S. ratings outlook to negative”

“WASHINGTON (MarketWatch) — Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable while keeping its Triple-A rating on the world’s largest economy. “More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said Standard & Poor’s credit analyst Nikola G. Swann.”

http://www.marketwatch.com/story/sp-cuts-us-ratings-outlook-to-negative-2011-04-18-910460

Only a matter of time. I’ve been stating for quite sometime that the United States has been functioning on borrowed money and it was only a matter of time before the rating agencies started think about downgrading U.S. debt. While not a downgrade of debt yet, even the mere fact that the U.S. is on “watch” doesn’t bode well for many markets including the equity, bond, etc.

It might not however affect the EuroDollar pair as Europe has its own internal problem (Greek, Portugal) debt, etc.

Zerohedge.com: “Blatant Treasury Churn At The Fed: Entire POMO Consists Of Just Auctioned Off 3 Year As FRBNY Launches “Flip That Bond” Program”

Its been quite a long time since I’ve posted. Unfortunately (or fortunately-depends on how one views it), I’ve been quite busy with work and setting up my fund. Hopefully, I’ll start posting on a more consistent basis. I wil also try to add more charts, personal  views, analysis,  etc. to my blog in the future.

To start, this is an excellent post from Zerohedge.com on the Federal Reserve and “Primary Dealers” and how the “Primary Dealers” to a certain extent “game the system”. To me, it seems like a complete cheating scam.

Here is the list of “Primary Dealers” directly from the Federal Resever Bank of New York:

http://www.ny.frb.org/markets/pridealers_current.html

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Here is the zerohedge.com article:

“Ok this is it. Someone (preferably of the less than multi-millionaire Wall Street marionette variety) in Congress has to look into the blatant bond churn-cum-flip (that was happening behind the scenes a few months ago and is now so blatantly in your face it is a slap to all US taxpayers) which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened – the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 (whose technical original issue date was yesterday). One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop.”

http://www.zerohedge.com/article/blatant-treasury-churn-fed-entire-pomo-consists-just-auctioned-3-year-frbny-launches-flip-bo