Saturday, May 23, 2009

Weekly Market Update (5/22/09)‏


The US Treasury market sold off this week on concerns about a potential downgrade of US government debt by the credit ratings agencies. more...

US Treasuries sold off this week pushing 10-year and 30-year Treasuries to their highest yield levels for the year as investors are preparing for the upcoming supply next week in US 2-year, 5-year and 7-year securities. more...

Large-Cap Equities
The stock market rallied this week on rising energy prices. Crude oil rose to its highest level in six months, ending the week at about $60 a barrel. more...

Corporate Bonds
Investment grade primary activity continued to rush to the market as issuers were looking to take advantage of improving sentiments and what seems to be a never-ending longing for yield in the credit market. more...

Mortgage-Backed Securities
The agency mortgage market sold off this week, yet traded very well relative to the Treasury market which saw prices reach six-month lows. more...

Municipal Bonds
Municipal bond market yields fell over the course of the last week and, in particular, longer maturities continued to outperform the rest of the market. more..

After a slight pullback in the high yield market in the preceding week, high yield bonds bounced back nicely, tightening in 55 bps relative to Treasuries and gaining roughly 2% for the week ending May 22. more...

Western European Equities
Stocks in Western Europe gained ground over the past week. The sectors with the best performance were basic resources (+9.7%) and banks (+8.7%). more...

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +7.5% this week, while the Russian stock index RTS went up +8.2%. more...

Global Bonds and Currencies
For major sovereign bond markets, the past week brought losses as attention focused on the sharp deterioration in the fiscal positions of the US and the UK. more..

Emerging-Market Bonds
Emerging market dollar-pay debt spreads tightened this week. Although risk markets were mixed, the lack of negative economic data and a back-up in US Treasury yields caused credit spreads to move lower. more...

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Friday, May 22, 2009

Is Mr. Geithner speaking today?

Thank to Jack Crooks. This is a MUST READ RANT!
FX Trading – Dollar Shrug! No surprise. Is Mr. Geithner speaking today? He is becoming such a joy for dollar bears, as John Ross mentioned in his closing to CC yesterday. And the dollar doom and gloom crowd is smelling blood in the water; rightly so! There are a lot of short dollar trades on it seems. We surmise Pimco has a big dollar short position given Bond King Bill Gross’s recent public musing about the US may lose its AAA rating. Comments like that shouldn’t be a surprise to anyone given the US government’s desire to take on the role of global stimulus King instead of just worrying about getting its own house in order—pathetic! Mr. Geithner says the US depends on other countries to grow and chastises them for not throwing enough of their taxpayers’ money into the “stimulus” program. Maybe he should take a look at that before he speaks…Of course the crony insiders tell us how “smart” Mr. Geithner is, and we don’t doubt his intelligence. Anyone that can avoid paying personal income taxes and still pull-off an appointment to Treasury Secretary (and run the IRS) is pretty smart. But our gripe is the fact that the guy instills negative confidence in the market place not because he lacks “leadership qualities,” as some have suggested, but because his economics seems all screwed up in my most humble opinion. We are in a gut wrenching transition in the global economy because the wildest orgy of debt the world has ever seen is over. Thus, excesses across all sectors, especially financial, must be removed from the marketplace in order for real quality long-term globally balanced growth to take hold. Instead, day after day we witness dinosaur saving from Geithner and friends, while stunningly they tell us this with a straight face (as straight as any government official possibly can) that we need to put more debt into the market in order to solve the problem of too much debt being in the market. Mr. Orwell call your office!

Now granted, few of us have toiled away at the top economic Ivy League institutions and rubbed elbows and other things against the top seers. Granted, we don’t have the luxury of feeding our ideas and inputs into the most sophisticated econometrics models imaginable built of course by the “best and brightest.” But it seems our angst grows from something the power elites don’t have—common sense. Putting more debt into a system desperately working to alleviate debt is just plain stupid no matter how the Neo-Keynesians slice or dice it. Is it any wonder why the globe is losing confidence in the dollar? It seems the guys that are supposed to be on our side consistently cow-tow to the other side. And of course, you know where I’m going here—China. It is farcical when China criticizes the US for overconsumption and not saving enough. They were enriched precisely because of the overconsumption, besides playing our multi-national “leaders” like a violin by offering cheap labor and short-term riches in turn for giving them technology which sooner or later will lead to the wiping out western business and sunk shareholder value as we know it. But that is another story for another day. The symbiotic game of China shipping containers full of stuff to the US for Federal Reserve Notes dwindling in value ended with the credit crunch. And guess which of the two formerly symbiotic players is getting crunched harder—if you said China you would have been right. But, in their Orwellian world of global chess, the Chinese pretend they are outperforming anything that moves. And their noises and lies and bluffs and fake economic numbers cannot deny the fact that if Mr. US Consumer does not get this symbiotic game of dollars for stuff going again, the Politburo may be out of a job—literally thrown out of a job, if you know what I mean. So, instead of realizing this upper hand of consumer demand the US possesses, the US government economic “leaders” agree with China that yes—it is highly important to stimulate the globe, we want 2001 again. If successful it would mean China continues to add global market share to their manufacturing behemoth and can avoid the dirty hard job of developing a domestic market.

Jack Crooks, Black Swan Capital LLC
Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide individual, customized
investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed
disclaimer can be found at

Please read the whole article here:

Market Reflections 5/21/2009

Warnings that the UK may lose its AAA rating raised questions over the risks of government stimulus and the effects of the recession -- not only in the UK but also here in the United States. Money fled offshore in a rare triple flop: stocks down, Treasuries down, and the dollar down. Jobless claims didn't boost any optimism showing little if any improvement in the labor market.

The bad news pushed the S&P 500 down 1.7 percent to 888.34, but funds didn't move into Treasuries where yields instead moved higher, up a very sharp 18 basis points on the 10-year to 3.37 percent. The dollar confirmed the exodus, falling 0.8 percent to 80.57 at day's end for the dollar index. The decline in the dollar, and with it the associated risk of inflation, gave a boost to commodities including oil, firmly above $60, and copper, firmly above $2. The bad news gave gold a boost, which at a hefty $954 is getting a boost from worries that economic conditions may not be on the mend after all.

Thursday, May 21, 2009

Jobless Claims

Released on 5/21/2009 8:30:00 AM For wk5/16, 2009
Previous Consensus Consensus Range Actual
New Claims - Level 637 K 645 K 620 K to 675 K 631 K

Market Consensus Before Announcement
Initial jobless claims for the May 9 week jumped 32,000 to a 637,000. The surge in claims likely reflected auto sector layoffs. But continuing claims were even worse for the May 2 week, soaring 202,000 to 6.560 million, the 17th straight rise and another record high.

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Jobless Claims
New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Why Investor's Care
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.


Weekly, data for previous week are revised to reflect more complete information.

Industrial Production In and Out of Recession

Industrial production plays a key cyclical role

Industrial production is more cyclical than the economy on average. That is, it falls further during recession and jumps more during recovery. The current recession started in January 2008 (with the prior expansion peaking in December 2007). How does this manufacturing recession compare to recent recessions? Is this the worst manufacturing recession since the end of World War II? And which industries have been hit the hardest and which have fared the best?

Different cyclical patterns

Recent recessions have followed different patterns. Thus far, the current recession in manufacturing is most like the 1973-75 recession. However, the 1973-75 saw an upturn in manufacturing 19 months after the peak. With one major auto producer in bankruptcy and another likely, it is not a good bet that manufacturing in this recession will begin recovery by July. Adding to this improbability is the downturn in exports, falling demand for construction supplies, and no pickup in consumer demand.

Both the 1990-91 and 2001 recessions were shallow and relatively short. It is interesting that the Fed has cut interest rates even more this recession than during the 2001 recession but the economy has responded less this time around. This speaks volumes on how different the current recession is – being more of a credit crunch than a simple downturn in demand and output.

The two years of data for the 1980 recession looks like a roller coaster. Not only did the 1980 recession (induced by oil price shocks to a large degree) end quickly, but it also fell back into recession within that two year period (including a portion of the 1981-82 recession) due to extreme Fed tightening.

Overall, there has not been any typical recession in manufacturing going back to 1972. But the current recession certainly is worst thus far and even is likely the worst since the end of World War II.
The hardest hit industry by market groups is consumer autos, down 34.5 percent since the end of expansion. Housing pulled down output sharply for appliances, furniture & carpeting, down 24.8 percent, and construction supplies, down 22.6 percent. On the business side of market groups, transit equipment fell 21.1 percent over the recession.

Some industries actually have not been touched much by the recession. These have been nondurables. One industry – energy – even posted a net gain of 1.7 percent over the 16 month recession period. The nondurables groups that fell little were chemical products, down 2.9 percent, and food & tobacco, down 3.2 percent. But demand has fallen for clothing and paper products with output for those groups down 14.9 percent and 10.0 percent, respectively.

Bottom Line

Indeed, the current recession for manufacturing is the worst in decades. Traditionally, the industries hardest hit during recession often rebound the most during recovery. Is that likely this time? With credit more restricted, the auto sector may not make as much of a comeback as is typical – even with interest rates so low. Tighter credit standards may cause construction industries to lag this time – notably those related to building new housing. But when home purchases do pick up, industries such as carpeting and appliances may do relatively well because they can improve along with existing home sales. Finally, if overseas economies – especially in Asia – rebound soon, we could see a rise in output for industries such as transit, industrial equipment, paper, and chemicals. Every recession and recovery in manufacturing has been different and that will likely be true this go around, too.

Market Reflections 5/20/2009

Hedge fund money continues to move into commodities, pushing oil to $62 and gold to $935. Commodities from grains to base metals are all benefiting. A big reason for the move is weakness in the dollar which ended near its lowest levels of the year, at $1.3768 against the euro. Weakening demand for the dollar is tied to inflationary expectations, against which commodities are used as a hedge. The S&P 500 ended at its lows, down 0.5 percent at just over 900. News in the session was headed by FOMC minutes where economic assumptions were cut and that show some policy makers think they may need to further increase their quantitative easing program.

Wednesday, May 20, 2009

Market Reflections 5/19/2009

Housing starts fell a very steep 12.8 percent in April, a reminder that the sea of unsold homes will hold down homebuilders even as sales improve. But the data didn't move the markets with the S&P 500 ending little changed just under 910.

Oil is moving higher, nearing $60 and raising talk of last year's $40-to-$147 super spike. But gold, at $925, is holding steady, enjoying two-edged strength as an inflation hedge against price demand tied to cyclical recovery or the hyperinflation of the doom-and-gloomers.

The Price of Things

Precious metals all climb - Sell in May and go away?
Dollar prolongs decline - Housing starts at record low.
Crude nudges higher - EIA report seen boosting inventories.
Base metals mixed - Poor housing numbers fail to knock copper into red.
The Price of Things
Resource Last 1 Week Ago 3 Months Ago 1 Year Ago
Gold 924.40 922.80 974.30 906.00
Silver 14.18 14.21 14.04 16.99
Platinum 1137.00 1129.00 1065.00 2148.00
Palladium 232.00 232.00 214.00 450.00
Copper 2.05 2.06 1.47 3.82
Nickel 5.63 5.84 4.42 11.73
Zinc 0.50 0.50 0.50 1.02
Uranium 51.00 46.00 47.00 60.00
Oil 58.86 58.01 41.70 125.39
Gas 3.94 4.48 4.07 10.94

Tuesday, May 19, 2009

The End Game Draws Nigh - The Future Evolution of the Debt-to-GDP Ratio

Nearly everyone I talk with has the sense that we are at some critical point in our economic and national paths, not just in the US but in the world. One path will lead us back to relative growth and another set of choices leads us down a path which will put a very real drag on economic growth and recovery. For most of us, there is very little we can do (besides vote and lobby) about the actual choices. What we can do is adjust our personal portfolios to be synchronized with the direction of the economy. The question is "What will that direction be?"

Today we are going to look at what I think is a very clear roadmap given to us by Dr. Woody Brock, the head of Strategic Economic Decisions and one of the smartest analysts I have come in contact with over the years, in his recent essay, "The End Games Draws Nigh." For those who have the contacts in government, I urge you to put this piece into the correct hands so that Woody's very distinct message gets out.
In my own simple terms, trees cannot grow in some unlimited manner to the sky. Families cannot grow debt without limit beyond the growth of their incomes. And countries have the same constraints. While growth of debt in the short term is viable, growth of debt faster than the growth of GDP is not viable over the long run. This is not debatable. It is a simple fact. Therefore, as Woody says, it is important that you get the growth side of the equation right as you increase the debt side. Without the proper balance, you are heading for disaster.

From his intro:

"We weave these three concepts together so as to make possible an extension and generalization of "macroeconomic policy" as normally understood. Central to this extension is the need for policies that drive down the nation's Debt-to-GDP Ratio over time. Accordingly, we identify 15 policies that jointly reduce the growth of federal debt and increase the growth of GDP over time. Doing so not only points to a new set of policies for exiting today's quagmire, but also permits an appraisal of the Obama administration's current policy proposals. Regrettably these proposals do not fare well with respect to growth. Furthermore, the extension of macroeconomics we propose applies not only to the US economy, but to most all others as well. It should thus be of interest to readers everywhere."

This will require you to put on your thinking cap. But you need to digest this, and especially the conclusions. But it is very important that you understand the principles and concepts Woody discusses. We are at a very critical juncture, and the paths we choose will have profound impacts on our lives and fortunes. I cannot overemphasize the point. If we choose a path of growing debt faster than we can grow GDP, the negative implications for many traditional asset classes are enormous.

A Trader's Best Friend

By Brian Hunt, Editor in Chief, Stansberry Research

Of all the friends in the world a trader can have, one of the most valuable is the concept of position sizing – a strategy that tells you how much money to put into a given trade.

Most great traders will tell you to never risk more than 2% of your trading capital on any one position. One percent is better for most folks. A half a percent is also good.

So here's how the math works...

Let's say you're a trader with a $50,000 "grubstake." And you're thinking about buying Intel at $20 per share.

How many shares should you buy? Buy too much and you could suffer catastrophic damage if, say, an accounting scandal strikes Intel. Buy too little and you're not capitalizing on your great idea.

Here's where intelligent position sizing comes in. Here's where the concept of "R" comes into play.

"R" is the amount of money you're willing to risk on any one position. You can easily calculate R from two other numbers: 1) your total account size and 2) the percent of your account you'll risk on any given position.

Let's say you want to go "middle of the road" with your risk tolerance. You're going to risk 1% of your $50,000 account on each idea. Your R is $500. (If you wanted to dial up your risk to 2% of your account, R would be $1,000.)

OK, so you've already decided you want to put a 25% protective stop loss on your Intel position. Now you can work backward and determine how many shares to buy.

Your first step is always to divide 100 by your stop loss number: 100/25 = 4.

Now, take that number and multiply it by your R: 4 x $500 = $2,000.

So you should buy $2,000 worth of Intel... At $20 per share, that's 100 shares. If Intel declines 25%, you'll lose $500 and exit the position.

That's it. That's all it takes to practice intelligent position sizing.

Now... what if you want to use a tighter stop loss, say 10% on your Intel position? Let's do the math...

100/10 (your stop loss percentage) = 10

10 x $500 (your R) = $5,000

$5,000/$20 (share price) = 250 shares

Tighter stop loss, same amount of risk, same R of $500.

Now let's say you'd like to trade Intel options. You're bullish, so you're going to buy Intel calls. The options you want to buy are $2. Yahoo lists options prices by price per share, but option contracts are for 100 shares... So one of your option contracts will cost $200.

A straight call option position is much more volatile than a straight stock position. So you could set a wide stop loss of 50% on your call position. A wider stop will mean a smaller position size. Take a look:

100/50 (your stop loss percentage) = 2

2 x $500 (your R) = $1,000

$1,000/$200 (price per call option) = 5 option contracts

Different stop loss, different position size, different kind of asset, same R of $500.

You can use the concept of R to "normalize" risk for any kind of position... from crude oil futures to currencies to microcaps to Microsoft. If you're trading a riskier, more volatile asset, increase your stop-loss percentage, decrease your position size, and keep your R steady. That way, you're risking exactly as much money on each of your ideas.

Our examples put R at 1% of your total portfolio size. Folks new to the trading game would be smart to start with 0.5% of their account. That way, you can be wrong 10 times in a row and lose just 5% of your account.

To have the importance of intelligent position sizing drilled into your head over and over again by the best traders ever, read Market Wizards by Jack Schwager. For a fuller explanation of R and intelligent position sizing, read Trade Your Way to Financial Freedom by Van K. Tharp. Both are incredibly important books for traders.

Good trading,


Shiller: Now You Can Short Housing

Friday, May 15, 2009 4:58 PM

By: Dan Weil Article Font Size

While the government is going through conniptions trying to stop investors from shorting stocks, housing guru and economist Robert Shiller is going the other direction.

He’s providing a security for investors to short the Case-Shiller home-price index. His firm MacroMarkets recently received approval for exchange-traded traded funds based on the index.

“One reason we have bubbles in the housing market is because there's been no way to short housing,” the Yale professor tells Time.

“The ability to short is essential to an efficient market, otherwise there's nothing to stop zealots from pricing things abnormally high.”

One version of the ETF (UMM) allows investors to buy the index.

“It's like buying a house, except you don't have to go through the real estate agent, take possession of a property, maintain it, rent it out,” Shiller says.

The other offering (DMM) provides an opportunity to short the index.

“Markets like this will also create an infrastructure for products,” Shiller says. “For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.”

As for housing’s current status, Shiller doesn’t think the market has bottomed.

“The conspicuous fact with our [Case-Shiller] data is that prices are still falling, although at a somewhat lower rate,” he explains.

Mark Zandi, chief economist of, puts it in only slightly more optimistic terms.

“I think we’re clearly moving in the right direction,” he tells Bloomberg TV. “I think a year from now we’ll find a bottom.”

© 2009 Newsmax. All rights reserved.

Housing Starts Released on 5/19/2009 8:30:00 AM For April, 2009

Previous Consensus Consensus Range Actual
Starts - Level - SAAR 0.510 M 0.540 M 0.500 M to 0.560 M 0.458 M
Permits - Level - SAAR 0.513 M 0.494 M

Housing starts in April fell sharply to a new record low for a series going back to 1959, largely on cutbacks in multifamily construction. Starts dropped another 12.8 percent, following an 8.5 percent decline in March. The April pace of 0.458 million units annualized was down 54.2 percent year-on-year and came in well below the market forecast for 0.540 million units. April's decrease was led by the multifamily component which plunged 46.1 percent while single-family starts edged up 2.8 percent.

By region, the fall in starts was led by a monthly 30.6 percent drop in the Northeast along with declines of 21.4 percent in the Midwest and 21.1 percent in the South. Starts rose in the West jumped 42.5 percent.

Permits also declined at the national level, falling 3.3 percent in April, after dropping 7.1 percent the month before. The April permit pace of 0.494 million units annualized was down 50.2 percent on a year-ago basis.

Equities should be disappointed by today's starts numbers. It appears that many have forgotten that starts are far downstream in the list of housing indicators. It should be expected that improvement in indicators such as the homebuilders housing market index or mortgage applications will take a long time to trickle down to actual new construction. This is especially the case as a spike in foreclosures is threatening to delay the sell down of housing inventories. Homebuilders clearly understand that any new construction will likely sit on the market for some time, having to compete with fire sale prices on foreclosures.

Market Consensus Before Announcement
Housing starts fell back 10.8 percent in March, following a 17.2 percent rebound the month before. But going back to January, atypically wet and cold weather in the South depressed starts, leading to the sharp rebound in February - which also was abetted by milder-than-usual weather. Looking ahead, many analysts see a glimmer of hope for housing from the 3.2 percent boost in pending home sales. But supply is still quite bloated and existing homes on the market may be getting heavier with the recent spike in foreclosures. Homebuilders still are likely to keep starts low for some time.

Housing starts measure initial construction of residential units (single-family and multi-family) each month. A rising (falling) trend points to gains (declines) in demand for furniture, home furnishings and appliances. Why Investors Care

Data Source: Haver Analytics

Market Reflections 5/18/2009

Strong earnings from home-improvement chain Lowe's, together with a rise in the housing market index, pushed stocks sharply higher Monday. Lowe's beat estimates, attributing results to improving consumer sentiment and indications that the housing sector is moving in the right direction. The housing market index rose for a second month, further raising talk that the worst of the housing slump may now be over. Other news included positive analyst comments on Bank of America, helping to drive banking stocks higher. The S&P 500 rose 3.0 percent to 909.71.

Money moved out of the safety of the dollar which fell 3/4 of a cent against the euro to end at $1.3560. The weaker dollar together with improved economic data raised the chances for inflation, making for big gains in commodities including oil which jumped $2-1/2 to $59. Demand for Treasuries eased in steepening trade with the 10-year yield up 10 basis points at 3.23 percent.

Monday, May 18, 2009

This Country Is the World's Most Likely Candidate for Hyperinflation

By Tom Dyson

Mrs. Watanabe is dumping the yen.

According to a story from Bloomberg this week, Japanese businessmen, housewives, and pensioners are dumping the yen against foreign currencies, especially the Australian dollar, the New Zealand dollar, and the euro. Women control the family finances in the typical Japanese household, so the international media has nicknamed the Japanese individual investor "Mrs. Watanabe."

Bloomberg says Mrs. Watanabe is now short 153,326 contracts against the yen. That's 35 times the short interest on March 4, the day the dumping began.

There's so much excess saving in Japan, the country's interest rates are miniscule. Right now, the interest rate on a one-year CD is Japan is 0.25%. Compare Japanese rates to foreign rates: The Aussie dollar yields 3%. The Brazilian real yields 10.25%.

Bloomberg explains Mrs. Watanabe's rush out of the yen as "yield hunting." This explanation makes sense. Japanese investors can make 12 times as much interest in the Australian dollar. Plus, all the foreign currencies made huge falls against the yen last year... The Aussie dollar fell 40% against the yen last year, for example. So to the Japanese investor, they must look cheap.

Here's the thing: The Japanese government is broke and can't pay back its debts. I think the gargantuan fall in the yen comes when Mrs. Watanabe figures out Japan's government will never pay back the $7 trillion she loaned it.

Check out the table from the IMF's World Economic Outlook published last month... It shows the debt-to-GDP ratio for the world's industrial nations. Japan is clearly the world's most broke major government...

(Zimbabwe has the world's most indebted government with a 2008 debt-to-GDP ratio of 241%, according to the CIA World Factbook.)

General Government Gross Debt as % of GDP
2005 2006 2007 2008e 2009e 2010e
Canada 71% 68% 64% 64% 75% 77%
France 66% 64% 64% 67% 75% 80%
Germany 66% 66% 64% 67% 79% 87%
Italy 106% 107% 104% 106% 115% 121%
Japan 192% 191% 188% 196% 217% 227%
UK 42% 43% 44% 52% 63% 73%
U.S. 63% 62% 63% 71% 87% 98%
Euroland 70% 68% 66% 69% 79% 85%
Source: IMF World Economic Outlook, April 2009

Another way of looking at the indebtedness of a government is debt per capita. In the U.S., for example, Uncle Sam owes $11 trillion... $4 trillion more than the Japanese government owes. If you express the debt per capita, the U.S. government owes $36,700 for every American citizen. The Japanese government owes almost twice as much: $70,000 per Japanese citizen.

Not only has the Japanese government built the world's largest and growing debt, but its ability to collect tax income is about to take a big hit. Japan is in a deep recession, and its businesses aren't able to sell goods abroad right now. Plus, Japan's population is shrinking and aging at the same time. Tax revenues will plummet just as the government's social security liabilities are ramping up. The Japanese government is in a hopeless situation.
Because the Japanese government is broke, I think Japan is the world's most likely candidate for hyperinflation. When Mrs. Watanabe realizes her government's credit is irreparably damaged, she'll dump her government bond and currency holdings and seek tangible assets...

Mrs. Watanabe's yield hunting could be the trigger that sets off the inflationary fireball in Japan. Consider shorting the yen ETF (FXY) to play this trend. Also, don't expect inflation in America until you see it in Japan first. After 20 years of deflation, Japan is much closer to the turning point than America is...

Thomas Sowell: Regulators Started Housing Crisis

Thomas Sowell: Regulators Started Housing Crisis

Sunday, May 17, 2009 5:18 PM

to read the full article click on the heading above

Respected economist Dr. Thomas Sowell, author of the new book "The Housing Boom and Bust," tells Newsmax that the current housing crisis can be blamed on pressure from government officials seeking to remedy a "problem that didn't exist."

Dr. Sowell also said politicians' stated concern about that so-called problem — a lack of affordable housing — is "a farce."

Editor’s Note: To see the full Thomas Sowell interview, Go Here Now.

Newsmax.TV's Kathleen Walter asked Sowell what caused the "house of cards" in the housing market to collapse.

"The most fundamental thing is that the money that was normally paid for monthly housing payments stopped coming in, or stopped coming in in the volumes that it had in the past," said Sowell, a senior fellow at the Hoover Institution at Stanford University.

"The question then is, why did that happen? And the reason that happened was that banks and other lending institutions began lending to people who did not meet the traditional standards for mortgage loans, but were given those loans under pressure from government regulators, and even in some cases under threats from the Department of Justice if their statistics didn't match what the Department of Justice thought they should be — for example, in terms of income levels, race, what communities they invested in, and so on."

Walter noted that Sowell asserts in his book that politicians in Washington were trying to solve a problem that didn't exist.

"The problem that didn't exist was a national problem of unaffordable housing," Sowell explained.

"The housing in particular areas, particularly coastal California and some other areas around the country, were just astronomically high. It was not uncommon for people to have to pay half of their family income just to put a roof over their head. So that was a very serious problem where it existed.

"But it existed in various coastal communities primarily and a couple of other places. Unfortunately, the elites whose strongholds are on the East and West Coasts don't seem to understand that there's a whole country in between, and in most of that country housing was quite affordable by all historical standards.

"So they set out to solve the problem by setting up a federal program to bring down the mortgage requirements, the 20 percent down payment and that sort of thing, and by forcing Fannie Mae and Freddie Mac to buy up those mortgages from the people who no longer had to meet the same requirements.

"The banks had no choice but to go along because the regulators controlled their fate. So the banks would simply sign up people, sell the mortgages to Fannie Mae and Freddie Mac. It now became Fannie Mae and Freddie Mac's problem. And that meant it became the taxpayers' problem."

Walter asked: "Who is really responsible for all this?"

"There are a lot of people who were irresponsible," Sowell responded.

"But the fundamental problem, the problem of reduced lending standards, with people buying houses even with no money down in some cases, that all came precisely from the regulators that people are now talking about as the salvation of the housing market.

"There's no such thing as regulation in the abstract. There are certain kinds of regulation that can have beneficial effects. Canada does not have the same problem that we have even though they have regulations. But their regulators are trying to make sure that the banks and other lending institutions are obeying clear-cut rules. Ours were trying to produce higher statistics on home ownership in general, and in particular trying to reduce the gap between low-income people and high-income people, blacks and whites, et cetera."

Walter asked what Americans can do to ensure that the housing boom and bust will not happen again.

"First and foremost the voters have to learn to be skeptical and to find out what the facts are," Sowell said.

"There is not the slightest incentive for a politician to behave better in the future. If voters don't understand that, it's going to happen again.

"This is the worst housing crisis we've had but it is not the first. This very same drive to increase home ownership occurred under the Republicans in the '20s. It occurred under the Democrats in the '30s, and it occurred under both parties in the '40s and '50s.

"There is not the slightest incentive for politicians to learn from their mistakes because they pay no price for it. And they'll never pay a price for it as long as the voters don't make an effort to find out what is going on."

Sowell added: "I see absolutely no reason why politicians should take charge of which way prices go. That's precisely what led to the current disaster. . .

"When you realize how long politicians have been talking about a need for affordable housing, you realize what a farce it is."

Editor’s Note: To see the full Thomas Sowell interview, Go Here Now.

© 2009 Newsmax. All rights reserved.

Quotable: risk asset investment train is leaving the station and you’d better hop on.

“Last Friday the European Commission published what were arguably the most catastrophic economic statistics produced by any official institution in the capitalist world since 1945. These figures showed that Germany has suffered the steepest economic collapse ever recorded in a major industrialised country; and that several of the countries in Central Europe and on the periphery of the eurozone are now in a state of economic and financial meltdown comparable with Argentina, Indonesia and Russia in the 1990s or with Iceland last year.”
Anatole Kaletsky

On Friday, German reported some very nasty economic news—their economy fell at a 16% annualized rate during the first quarter of 2009. An excellent summary of the key problems now facing Germany and the Eurozone is provided by Anatole Kaletsky, an economic commentator for the UK Times and resident guru for GaveKal. We have provided the key points below for your perusal[our emphasis]:
Last Friday the European Commission published what were arguably the most catastrophic economic statistics produced by any official institution in the capitalist world since 1945. These figures showed that Germany has suffered the steepest economic collapse ever recorded in a major industrialised country; and that several of the countries in Central Europe and on the periphery of the eurozone are now in a state of economic and financial meltdown comparable with Argentina, Indonesia and Russia in the 1990s or with Iceland last year.” I have described repeatedly the three interacting elements now hitting Europe in a “perfect storm”. The first element is Germany's dependence on exports, especially of capital goods, cars and other consumer durables. … The second element of the perfect storm has been the reckless lending to Central Europe and the Baltic States, especially by banks based in Austria, Sweden, Greece and Italy, which in turn have been large borrowers from German investors and banks. … The third component of the economic hurricane is the euro itself. … The ultimate result is that the European economy will be caught in a 1930s-style deflationary spiral of deteriorating credit, deflationary government policies, falling wages and even further declines in credit. The most plausible way for Europe to escape from this vicious circle will be for Germany to abandon its age-old philosophy of fiscal rigour, to embark on a large-scale fiscal stimulus and to guarantee the debts of all its partners in the eurozone. A 16% annualized beating in the economy on Friday and the euro is flat at the moment after clawing back from losses earlier this morning.Fundamentals do matter. But as we know, what matters most is the perception of the fundamentals by traders. The idea that the worst is over means the rear view mirror bad news, such as a 16% annualized fall in the economy, marks the bottom because “it can’t get any worse.” At least that’s what the move in the stocks is telling the currency crowd—risk asset investment train is leaving the station and you’d better hop on.
Fundamentals do matter. But as we know, what matters most is the perception of the fundamentals by traders. The idea that the worst is over means the rear view mirror bad news, such as a 16% annualized fall in the economy, marks the bottom because “it can’t get any worse.” At least that’s what the move in the stocks is telling the currency crowd—risk asset investment train is leaving the station and you’d better hop on.

Click on the link to read the full article.
Thanks to Black Swan Trading.