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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