If USD collapses

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PGM's

Platinum Group Metals ???

[arco]

We learned today that the global recession, as defined by rising global unemployment, is only just getting underway.

It might feel like it has been going for more than 12 months and you might be getting very tired of it already, but the collapse in the real economy is just a few months old – following the global economic “cardiac arrest” last October – and is now building a head of steam.

In the past 24 hours companies in the United States and Europe announced job cuts totalling 62,000, headed by Caterpillar’s decision cut its workforce by 20,000.

In addition there was Sprint Nextel (8,000), Home Depot (7,000), Pfizer (8,000), General Motors (another 2,000), ING (7,000), Phillips (6,000) Corus (3,500). Last week Microsoft announced 5,000 lay-offs, while in Australia BHP Billiton said it was cutting 3,000 jobs.

So the rise in unemployment, especially in Australia, is still in its infancy, as is the impact of the slowdown on corporate earnings.

Although this began as a credit crisis and will only end when the world’s banks are repaired and can reopen for business, what is now unfolding is the “reverse wealth effect” – the opposite of the consumer spending and business investment boom that came out of the housing and sharemarket bubbles.

In his latest letter to clients, Jeremy Grantham of the Boston based investment firm GMO, lays out graphically how the reverse wealth effect works for the United States.

Assuming declines in value of 50 per cent for the stockmarket, 35 per cent for housing and 35-40 per cent for commercial real estate, there has been a total loss in perceived wealth (my emphasis) of about $US20 trillion from a peak of $US50 trillion.

US GDP – the annual value of goods and services produced – is $US13 trillion.

“These write-downs not only mean that we perceive ourselves as shockingly poorer, they also dramatically increase our real debt ratios."

The national private asset base of $US50 trillion was supported by debt of $US25 trillion. Now the asset values have fallen back to $US30 trillion, while the debt remains at $US25 trillion, “give or take the miserly $US1 trillion we have written down so far”.

Maintaining the same gearing ratio means the debt has to be written down to $US15 trillion. However, as Grantham points out: “As always, now that it’s raining, bankers want back the umbrellas they lent us.” That is, they are demanding lower gearing ratios – no more than 40 per cent, not 50 per cent.

That means $US12 trillion in debt, not $US15 trillion – half the current level. So somewhere between $US10 trillion and $US15 trillion in US needs to disappear.

That’s just the United States. The story is being repeated around the world – in the UK, Europe, Japan, Australia, Russia, Iceland and now China.

The decline in real wealth, and the amount of debt that has to “disappear” is almost unimaginable.

Short of finding another bubble to reinflate asset values, there are only three ways to do it: write the debt off, inflate the money supply and reduce the real value of the debt, or do what Japan did and take years – decades – to gradually save more and pay down the debt (that hasn’t actually worked for Japan yet, by the way).

Each of these three measures is now underway. Each is extremely painful and takes a long time.

The sharemarket has already anticipated a big decline in earnings with its fall of 50 per cent. Is it enough?

The problem is that price/earnings multiples can change for long periods at the same time as profits fall. A profit decline of a third accompanied by a halving of the P/E ratio produces a price fall of two-thirds.

Over the next few weeks we will get a clearer idea of the likely decline in corporate earnings, although it's clear that companies are already seeing what’s coming and are cutting staff in readiness.

No one can really know what’s coming – it’s too early in the process.

But as Grantham reminds us, only “make-believe assets” are being destroyed – that is, the inflated values of shares and houses.
“It is worth remembering that real wealth lies not in debt but in educated people, laws, and work ethic, as well as in the quality and quantity of fixed assets and the effectiveness of corporate organisation.”

When we have dealt with this crisis all of those assets will be sitting around waiting to be put to full use again.

http://www.businessspectator.com.au/bs.nsf/Article/Brace-for-a-20-trillion-write-down-$pd20090127-NNQY6?OpenDocument&src=ea&ir=4

[arco]

McDonald's - world's largest restaurant chain, reported a 23% profit drop in Q4 despite a tax gain in the year-earlier period, according to Bloomberg news. The company's net income fell $985.3MM, or $0.86 per share vs $1.27bln, or $1.06 per share a year earlier. Analyst's F/C a profit of $0.83 per share.

[Aussie]

Which currency is best to buy to benefit from the USD weakness?

Dr. I would say it depends on your timeframe. If you know what you are doing and trade aggressively you can probably make some money but IMHO, ultimately there is no paper currency that will benefit and here's why.

CB's the world over are racing to lower interest rates and devalue their currencies to inflate away debt. Also, every government (including ours) wants to have as competitive an export economy as they can in order to try and help their balance of payments at a time when they are running or planning to run huge deficits for years to come.

Bill English said at the weekend that NZ's debt will likely increase by some NZ$50B over the next 4 or 5 years to around $80B. That's a lot for a small country with a tiny (and shrinking) GDP. It WILL affect our credit rating and our currency - how can it not? Over the medium term, I mostly see further and prolonged NZD weakness unless the commodity and export sector improves dramatically.

As I said, IMO it's quite likely that the AUD, NZD and CAD will get a bump as the USD falls as long as it falls in an orderly fashion. If that fall becomes disorderly, then all bets are off since most countries have foolishly relied on USD and US Treasury paper as the "reserves" to back their own currencies. What happens if those reserves drop in value unexpectedly? If the reserves that underpin a nations currency suddenly drops say 30%, 40% or even 50% in short order due to unforeseen events or a lack of confidence, what do we suppose will happen to the value of the currency itself?

Look at what a nightmare the EU is becoming for it's more affluent members like France, Germany and The Netherlands etc . . . it's fast become a currency and economy trap. It is being dragged down by indebted, near insolvent economies like Ireland, Spain, Greece, Italy and the Baltic states. Violence is erupting daily in some of these countries. Under the charter, the EU cannot bailout these economies as the US Fed would, but you know it is likely happening anyway - in secret. It is in effect an additional tax on the German people and if they ever found out . . . there would be real fireworks.

Brussels will do what ever they can to keep the Eurozone experiment together but ultimately, it will show that one economic policy and currency cannot serve the best interests of 27 different nations.

We cannot trust governments to manage our wealth. This is why I am into the hardest currencies of all - gold and silver. Their time is fast approaching.

Interesting video here for anyone who hasn't seen it . . .

Cheers

http://nz.youtube.com/watch?v=pZsY1rFr_yw

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is it time ?
I've got a couple of USD/CHF shorts in place from last night ... and this mornings rally looks corrective = the downwaves look convincing. added another now. av price = 1.1650

trying to use that time strategy from the general chat thread on it - quite interesting , seems to fit the turning points reasonably well.

in the picture similar colour lines are duplicates of each other

[arco]

Peat

Interesting set-ups on the chart at the mo.

Are you targeting the uptrend line (H1/H4 chart) or a bigger move? (Uptrend line daily - from potential Gart). Target circa 1.0530-1.0600

[arco]

1:04 PM, 2 Feb 2009

It's about time we called a spade a spade. We are looking at the biggest concealment of capital losses the world has ever seen. Until banks around the world come clean, reveal their hidden losses and cover them with capital will we not be able to see an end to the crisis.

Much more.........

http://www.businessspectator.com.au/bs.nsf/Article/Time-to-spill-the-beans-$pd20090202-NV3QR?OpenDocument&src=kgb

.

[Aussie]

US Treasury in plans for record debt sale

Published: February 4 2009 18:01

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was "prepared to" buy Treasuries if that would be a "particularly effective" way of reducing private borrowing costs.

"The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects," said William O’Donnell, UBS strategist.

The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities.

At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.

For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up.

The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.

Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt.

In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.

http://www.ft.com/cms/s/0/bdf4ee70-f...0779fd2ac.html

[Aussie]

This is a very recent interview with Paul Keating on ABC Australia's "Lateline". Keating was a longtime Australian Treasurer under Bob Hawke and Australian Prime Minister from 1991 till 1996.

In this very thoughtful interview, he lays out a startling accurate picture of the current global situation, including a very bullish outlook for gold, which is a position not normally associated with someone who has been an insider and extremely intimate with the inner workings of the global economy at a high governmental level and he actually calls for the abolition of the iMF and the creation of a new financial system.

When in power, Keating was not known for his personal modesty or humility, but I do get a sense in this interview that he is chastened and awed by the extreme gravity of our current global predicament.

Enjoy.

http://www.abc.net.au/lateline/conte...8/s2480345.htm

The page also includes a handy transcript.

[Aussie]

U.S. Treasury default bets surge, hit new record

NEW YORK, Feb 4 (Reuters) - Rising U.S. government borrowing has a growing number of investors betting on a potential default by the Treasury down the line, according to credit default swaps data on Wednesday.

According to CMA DataVision, five-year U.S. CDS spreads stood at 82 basis points on Wednesday, having closed on Tuesday at a record 85.9 basis points. As a result, it currently costs $82,000 a year to protect $10 million of U.S. debt.

That is up tenfold from levels seen a year ago and even more from the negligible levels that were common before the credit crisis.

The CDS market is used to hedge against the possibility of sovereign and corporate defaults, and has played a controversial role in exacerbating the credit crisis.

Many believe a default by the U.S. Treasury is a physical impossibility, since all of the government's debts are denominated in its own currency and it could conceivably print more dollars to meet their obligations.

http://in.reuters.com/article/market...31292120090204