Apr 06

10 Year Treasury Note in Focus

Posted by Kristjan Velbri | Posted in Economy | Posted on 06-04-2010

During the past couple of months I’ve been really busy studying and going through my Statistics 101 course notes to figure out how to make all the things taught in class work for the benefit of my portfolio. So far it has been an interesting journey. Unfortunately, there are only 24 hours in a day and thus I’ve been unable to find the time to update my blog. Much has happened since I last posted. Among many other things, visible cracks are beginning to appear in the bond market with news out that the US Treasury has been having trouble selling debt. Since time is of the essence for both you and me, I won’t bother going into the fundamental details of why the Treasury is having trouble, especially as the economic and financial problems of the US are well-known anyway. Nonetheless, I would like to present to you a chart of where interest rates are going. What is the effect of higher interest rates? Lower earnings, weak or no housing recovery, higher debt payments for both the public and private sector even bankruptcies. All in all, even though the US economy is showing signs of a robust recovery, the future doesn’t look too bright. Throw growing government expenses, higher taxes, rising demand combined with a flat-lining supply of oil into the mix and you have the ingredients for another economic meltdown in the US at or around 2012-2014. Whatever the US does right now better be geared toward preparing for the future. There are some signs of this happening, but unfortunately, only on the margin.

$TNX

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Mar 13

United States Spending vs Revenue

Posted by Kristjan Velbri | Posted in Currencies, Economy | Posted on 13-03-2010

Some time ago, Obama suggested opting for pay-go, the implementation of which would require the Congress to find financing for new projects before writing a check – this way federal deficit would be capped at current levels. Needless to say, nobody really cared about that and new checks were written, which further added to the decifit. This chart really tells you everything, doesn’t it?

United States: revenue versus spending

Unfortunately, there is no indication that this is about to change any time soon. Indeed, the President and the Congress are talking about deficits all the way into 2020. But what does this mean for the US economy and the US dollar?

1. Rising debt means bigger interest payments (currently around $250 billion), with higher interest rates, this could double in a matter of years. Interest payment goes into spending, but if they want to keep spending the way they have, the deficit will rise even further.

2. More debt means the US dollar will have to weaken – after all, they are ‘paying off’ old debt with new debt. This doesn’t have to happen overnight, but if deficits aren’t brought down to a manageable level, the US dollar will very likely fall like it did during 2000-2007 – slowly, but in a determined fashion.

3. More debt, more money printing and a falling dollar will lead to higher inflation numbers. Again, this is a process much like the weakening of the dollar. Don’t expect hyperinflation until you see the signs (you will know when you see it). But there will have to be at inflation, even amidst all the deleveraging and defaults.

4. US companies will find it increasingly harder to make money. Why? Because more spending and falling revenues always lead the politicians to raise taxes. Indeed, this has already been happening – states, cities and counties all over the US have raised taxes and fees for almost everything. The expiration of the Bush tax cuts further raises the tax burden and there are talks about carbon taxes and even VAT in the US. This should be a time of lowering tax rates, not increasing them. Go figure.

5. Living costs are going to go up, up and away. A falling dollar and higher tax rates can only mean one thing – the US will have to pay way more for its imports, especially staples that are in tight supply over the long term. I’m talking about oil and food. There doesn’t seem to be a shortage or a bottleneck right now, but it has been acknowledged that food supply is at a critical point (record low warehouse supplies and a growing population that eats more every day). Developing agricultural land is a tough one these days as there is less and less arable land every year. Combine that with water shortages and you have a problem. Oil supplies aren’t anything to cheer about either – you can argue all you want over peak oil, but the fact is that oil is getting harder and more expensive to get out of the ground. So, all in all, with the supplies of staples running almost below demand, you can be sure that food and energy will get a lot more expensive.


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Dec 20

Financial Sense Newshour – Best of 2009

Posted by Kristjan Velbri | Posted in Book Reviews, Economy, Energy, Markets | Posted on 20-12-2009

As this year draws to a close, it would be appropriate to take a look at the best of 2009. Since the last months of 2008, I’ve been a follower of Jim Puplava and his excellent weekly financial news talk show. The second hour of each Financial Sense Newshour features an author of a book written about economics or finance. Here’s my top 8 for the year that was. Enjoy!

1. Inflation vs. Deflation debate – 2009 was a year of endless debate for inflationists and deflationists and it seems that neither side has settled down yet. In the previous show Mr. Puplava hinted that there would be another inflation vs. deflation debate in January 2010.

2. Trend of 2009 – interview with Gerald Celente, the trends forecaster.

3. Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG – this is the story of how AIG grew to be such a large institution and what undid the company.

4. Oil 101 – the best guide to the oil industry: from the well to the pump.

5. Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy - if you like Barry’s style, you should check out his blog at www.ritholtz.com

6. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts

7. “The New Market Wizards: Conversations with America’s Top Traders - an excellent interview based on the best-selling book by Jack Schwager

8. “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse” – another great book by Thomas Woods. There are more interviews and presentations with Thomas Woods at the Mises Institute.

The full list of 2nd hour interviews is available here.

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Dec 14

Interview With Paul Volcker, the Man Who Killed Inflation

Posted by Kristjan Velbri | Posted in Economy | Posted on 14-12-2009

UPDATE! Apparently, WSJ has also done an interview with Volcker. Here it is.

Der Spiegel has done an interview with Paul Volcker that sheds some light on his opinion of the economic recovery.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

Paul Volcker was the Chairman of the Federal Reserve from 1979 to 1987. During the time he took office, inflation was running at 12% annually and people were buying gold, art, real estate, anything to and everything that had real value because there was no end in sight. When Volcker took office, he raised fed funds rate to around 20%, which plunged the United States into a recession. Truth be told, raising interest rates was the only cure and had to be done sooner or later to cure rampant inflation and put the US back on track. Although Volcker was heavily criticized for his actions, he is now viewed as the only person who had a clear head and the spine to do what he did. The interview is short, but it is well worth reading.

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Dec 02

Real Stories of the Housing Collapse in America

Posted by Kristjan Velbri | Posted in Economy | Posted on 02-12-2009

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