AAA Rating Tough to Defend as U.S. Debt Soars: Kevin Hassett
Kevin Hassett, Bloomberg.com
By Kevin Hassett - Jan 30, 2011 7:00 PM MT
Bllomberg.com
Last week, Standard & Poor’s lowered Japan’s bond rating to AA-, the fourth-highest level. By that standard, the U.S. got away with a slap on the wrist from Moody’s Investors Service, which warned merely that “the probability of assigning a negative outlook in the coming two years is rising.”
If you look at the U.S. budget trajectory with an eye on the lessons from Japan’s recent history, there’s a strong case that the U.S. rating should be cut immediately.
It’s true that the U.S., with total government debt equal to 98.5 percent of gross domestic product, according to Organization for Economic Cooperation and Development data, has many years of unrestrained deficits ahead before it reaches the crisis point of Japan, which has debt of 204 percent of GDP.
A more plausible target, however, is 135.4 percent of GDP. That was Japan’s debt in 2000, just before S&P first downgraded it from AAA in February 2001.
If the U.S. makes no fiscal progress, and continues to run annual deficits at the 2011 level of $1.48 trillion dollars, it will take just six years to reach a debt level of 135.3 percent of GDP. The Japan precedent suggests the U.S. would lose its sacrosanct AAA rating at that point, if not sooner.
To be fair, the Congressional Budget Office, in its forecasting, predicts that the U.S. will do better than that, in part because revenue should increase as the economy recovers.
CBO’s wholly unrealistic baseline forecast suggests the day of reckoning is far off. Don’t believe it.
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Marc Faber: Gold is Not in a Price Bubble
Commodity Online
Global economic analyst Marc Faber says that the recent fall in gold price should not be taken to create fear among the investing community that the yellow metal is in a bubble.
Faber, who correctly predicted the 1987 economic crash, said in an interview to Bloomberg that he is bullish on commodities, especially on gold.
Faber, editor and publisher of The Gloom Boom & Doom Report, stated that he still “likes gold” and does not believe it is in a bubble.
Terming the recent weakness in gold prices as a pure correction, Faber said that “from the top to the bottom the correction could be 20%.”
While Faber did not provide a longer-term target price for the yellow metal in this interview, he predicted a 10% drop in the S&P 500 over the shorter-term, noting the historically high levels of bullish sentiment as a contrary indicator.
When asked what he believes would be a better economic policy, Faber said that that “I think what should happen in the U.S. is for the president to tell the U.S., you have to tighten your belts."
"We have to go through hard times for five years to repair the damage that was committed over 20-25 years by the Federal Reserve, by the Treasury, by the politicians, and somebody has to tell the truth. But the politicians keep on fueling the illusion that you can spend yourself out of the misery, and that by printing money you will improve the economy, which is not the case,” he said.
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Gold Investors Should Stay Focused
The Street
Last week was an eventful week at home and abroad with several events directly showing up in the performance of global markets and the price of gold. On Friday, Egypt's mayhem in the streets caused uncertainty in the markets, but sent gold shooting up over $21 to close at $1,336.75.
On Wednesday, a continuation of the Federal Reserve's easy monetary policy pushed gold up double-digits. Earlier in the week, a small hedge fund that had overleveraged itself to gold futures blew out its position, causing the biggest ever one-day reduction in futures contracts for the Comex.
This small hedge fund trader fell victim to one of the oldest flaws in capital markets -- arrogance with excessive leverage. This is the same infallible, overleveraged attitude that took down Fannie Mae, Lehman Brothers, Long-Term Capital Management, Enron and a number of Main Street American Home Buyers who leverage themselves 100-to-1.
By overleveraging his small $10 million fund, he was able to control the equivalent of South Africa's annual gold production, according to the Wall Street Journal. That's one small fund controlling an amount of gold equal to the world's third-largest producer?
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John Paulson Earns $5 Billion by Betting on Gold
The Economic Times
John A. Paulson made $4 billion betting against newfangled mortgage investments. But he made even more betting on an old-fashioned investment: gold.
Paulson, a hedge fund manager who sprang to fame when the housing market collapsed, personally made about $5 billion in 2010, according to two investors in his company.
How? Paulson bought gold – lots of it. His firm, Paulson & Co., owns securities that represent the rough equivalent of 96 metric tons of the metal.
It is an outsize wager by almost any standard. Paulson’s firm does not actually own all that gold. But if it did, it would be sitting atop more gold than the Australian government. Paulson himself would be holding more gold than Bulgaria.
Paulson is known for betting big. His payday for last year exceeds the $4 billion he made for 2007. He became one of the most celebrated hedge fund managers in the business after his firm shorted subprime investments.
The 2010 income, which was first reported by The Wall Street Journal, was the culmination of a remarkable comeback for Paulson last year.
While Paulson’s firm oversees about $36 billion of assets in a range of hedge funds, the bulk of his personal fortune is invested in his funds that buy securities linked to the price of gold. Gold jumped almost 30 percent in 2010. So far this year, however, it has fallen almost 6 percent.
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Gold’s Biggest Gain in 12 Weeks Is ‘Capitulation’ End
Bloomberg
Pham-Duy Nguyen and Yi Tian
The “capitulation” in gold that drove the metal to its worst January in 14 years may be ending as escalating violence in northern Africa spurs demand for a haven and after a key technical indicator held.
Futures traded on the Comex exchange in New York jumped 1.7 percent on Jan. 28, the most since Nov. 4, as thousands of people took to the streets of Egyptian cities to protest the 30- year rule of President Hosni Mubarak. Gold earlier rebounded off its 150-day moving average, an indication the metal may surge 21 percent to a record by the end of June, according to technical analysis by the Hightower Report.
“The capitulation is over,” said Tom Pawlicki, an analyst at MF Global Holdings Ltd. in Chicago, who correctly predicted in September that the metal would keep rallying to $1,350 an ounce after reaching a record. “The liquidation has washed out the weak trades and put gold at a point that looks attractive to new buyers.”
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Gold Rallies 2.5 Percent on Safe-Haven Play, Egypt
Reuters
Frank Tang
Gold surged 2.5 percent on Friday, bouncing $40 per ounce off session lows as fears that unrest in Egypt will spread across the Middle East prompted investors to buy the precious metal as a safe haven.
Egypt's president Hosni Mubarak imposed a curfew and ordered troops to back up police as they struggled to control crowds who flooded the streets of Cairo and other Egyptian cities on Friday to demand that he step down.
"All things Egypt. There is a major flight to quality...a stronger dollar, and flight into bonds, flight into gold," said Frank McGhee, head precious metals trader of Integrated Brokerage Services in Chicago.
"Gold is benefiting more than bonds at this particular point. People are looking at gold as a safe haven in times like this, and it's certainly showing it," he said.
Investors often turn to gold as an insurance at the expense of paper currencies during times of political and economic uncertainties.
Spot gold rose 2.3 percent to $1,343.01 an ounce by 11:58 p.m. EST (1658 GMT), the largest one-day gain in nearly 3 months. U.S. gold futures for February delivery rose $24.7 to $1,343.10 an ounce.
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Gold Jumps Most in 12 Weeks on Haven Demand Amid Egypt Tensions
Bloomberg
Pham-Duy Nguyen
Gold futures jumped the most in 12 weeks on demand for a haven amid escalating tensions in Egypt.
Tens of thousands of marchers chanted “liberty” and “change” as rallies began today at points across Cairo in the biggest challenge to Egyptian President Hosni Mubarak’s 30-year rule. Before today, gold dropped 7.1 percent this month. Earlier, the price touched a four-month low.
“The big turnaround in gold has to do with the escalating crisis in Egypt,” said Matthew Zeman, a metal trader at LaSalle Futures Group in Chicago. “People are saying it’s better to be safe than sorry,” and investors also are unwinding bets on a decline, he said.
Gold futures for April delivery rose $22.30, or 1.7 percent, to $1,342.10 an ounce at 12:19 p.m. on the Comex in New York, heading for the biggest gain since Nov. 4. Earlier, the price touched $1,309.10, the lowest since Oct. 1. The metal climbed to a record $1,432.50 on Dec. 7.
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Gold Prices Ready to Rebound to New High
Commodity Online
Gold prices saw heavy corrections in the recent days. From its unquestionable number uno position, it fell slightly putting investors to panic. But technical indicators are showing sufficient signs that it will have a rebound.
In International markets, Gold future prices went down by more than one percent on Thursday on technical selling. Gold in international markets last traded at 1316 USD per ounce. Gold prices have corrected by more than seven percent from its peak but is likely to fall further on technical selling and could touch 1295-1280 levels within next few trading days.
Gold prices are likely to make a short term bottom near 1310-1260. Gold prices seen rising further after it make a platform near 1260-1300. Positional traders can buy Gold near 1260 keeping a stop loss of 1245 and can book profit near 1320-1370. Gold prices could touch 1600 mark by the end of current year 2011.
At MCX, the Indian commodity bourse, Gold April future prices settled down on Thursday at Rs. 19915 per ten grams against previous day’s close of 20167 down by 252 rupees.
MCX April Gold contract opened down this morning at 19875 tracking weak international markets, made an intraday low at 19766 which is 14 week low and last traded flat at 19915 after it made an intraday high of 19921.
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Obama’s Spending Freeze Just ‘Spare Change’: Roubini
CNBC
The White House plan to partially freeze government spending is just "spare change" compared to a budget deficit of more than $1 trillion and eventually the US will have to raise taxes, economist Nouriel Roubini of Roubini Global Economics told CNBC Wednesday.
President Barack Obama proposed a five-year freeze on non-discretionary defense spending for five year to lower the deficit by about $400 billion.
But more actions will be needed to seriously tackle the deficit, Roubini said at the World Economic Forum in Davos, Switzerland.
The government will have to work on reform on entitlement programs like Social Security and "also eventually raise taxes for both the rich and the middle class," he said.
Until that happens, the Chinese will have to continue to buy US Treasurys, because "there is not alternative for them" and if they stopped their currency would appreciate sharply and hurt their exports and growth, Roubini said.
"Whether the Chinese like it or not, for the time being they will have to fund the United States, he added.
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How to Abolish the Fed and Convert to Gold as Money
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Activist Post
David Redlick
Now that Rep. Ron Paul (R, TX-14) has become Chairman of the House Financial Services Subcommittee, which provides congressional oversight of our central bank, the Federal Reserve System (Fed), the managers at the Fed are facing the dreaded time when they may have to reveal the secret dealings that they use to help their political and banking friends worldwide.
Vanity and job security are a big part of what guides Fed managers. They love the power and prestige of their jobs, and do whatever is needed to please the politicians who put them there. Of course, most of them are ‘true believers’ in the need for their control of ‘monetary policy’, despite the horrible record of the Fed, which has caused the US Dollar to lose over 95% of its value (purchasing power) causing prices to rise (price inflation) since the illegal, unconstitutional, creation of the Fed in 1913. The main reason for this decline is expansion of the money supply (monetary inflation) caused by creation of fake ‘fiat’ money; where ‘face value’ is decreed by the government, even though the material it is made of may have more or less market value.
Most countries have central banks, but ours is the only one that is a private corporation owned by other banks; more on that below. Rep. Paul has made his concerns and solutions clear in his popular September, 2009 book End the Fed, as I have in my December, 2010 book Monetary Revolution-USA. As in these books, this essay will show why sound money (coins made of, or paper backed by, a commodity such as gold or silver) ends the so-called need (and means) for the counter-productive meddling of ‘monetary policy’ and fake money by the Fed in our nation’s economy.
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