Why Italy Isn't In Such Bad Shape, But the U.S. and UK Are

Bill Gross runs PIMCO's huge flagship bond fund which, having engaged in an untimely shorting of U.S. Treasuries, has hit a bit of a rough patch in recent times. Some have suggested that the 69-year old might be a few years past the recommended portfolio manager retirement age and that it's no longer as useful as it once was to read his monthly investment newsletters.

Think again.

While Gross's timing on shorting U.S. treasuries has been poor, and his revealing in this month's column of memory issues is a little unnerving, his analysis of the fundamentals and medium to long-term sovereign fiscal picture remains sound.

Take his updated 'Ring of Fire II' chart, the first version of which he first published a few years back. The chart (below) plots countries by both their annual public sector deficit (y-axis), which is the difference between government spending and taxes, and what is termed a 'fiscal gap' (x-axis). The fiscal gap takes into account future expenditures, which in the U.S.'s case include entitlements such as Social Security, Medicare, and Medicaid.

As you can see from the chart Italy appears to be in better fiscal shape than several 'Ring of Fire' members like the U.S., Japan and the UK.  How is this possible? Italy has been experiencing what economists refer to as a 'speculative attack' from the sovereign bond market, while the three Ring of Fire countries are currently enjoying record low yields on their government debt. 

Continue reading the full article here.

Video: Michael Burry 2012 UCLA Commencement Address

Video: Niall Ferguson Interviews Peter Thiel

Prediction #1: U.S. Dollar Bears Will Remain On the Run in 2012

Since its March 2008 low the U.S. Dollar is up 13% against a basket of the world's most widely held currencies, including the yen, sterling, franc, loonie, krona, and of course the beleaguered euro.

How is this a problem for portfolio manager Axel Merk, the self described "Authority on Currencies"? After all, according to Merk's written after-the-fact letters he claims to have traded out of and back into the euro just in time to surf its wild gyrations.

Merk moved his fund management business to California a number of years ago, where he has been beating a steady 'demise of the U.S. dollar' drumbeat ever since. This past year Merk Funds even took to deploying amusing anti-Dollar cartoon propaganda while routinely touting the superiority of the euro over the U.S. dollar.

Continue reading the full article at Seeking Alpha here.

Eurozone QOTD: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks"

Quote is from Bridgewater, which with an estimated $122 billion in assets under management is the world's largest hedge fund.

Previously Bridgewater founder Ray Dalio said he didn't expect the next major crisis to hit until 2013, but it appears his firm is positioned for a rocky 2012.

As the Euro Rolls Over, Why Hasn't Gold Rocketed?

In early May of this year, with the euro hovering in the $1.46-$1.48 range, I disagreed vehemently with euro bulls such as portfolio manager Axel Merk who argued that the common currency was no longer vulnerable to a sell-off (see Merk's May 11 FT article titled 'Dollar in graver danger than the euro' and my counter arguments here, here, and here). 

Merk's argument was basically that in 2010, when the euro sank to a low of $1.18, the currency served as a proxy for the sovereign debt crisis. Now, however, investors were shorting sovereign debt directly and, according to Merk, recognized that it is a lot harder for the ECB to print euros than it is for the Fed to print dollars.

For awhile, as you can see from the below chart, it appeared that Merk perhaps had made a good point. From May the euro has shown remarkable resilience; for the last six months one sovereign after another has white knuckled its way through uncertain debt auctions and ever higher interest expense. Meanwhile the ECB kept its 'bazooka' semi-holstered with purchases of sovereign debt apparently capped at €20 billion per week. While the euro did soften from mid-May onwards it was able to keep it's head above the $1.40 mark for the summer and a good chunk of autumn.

Click to enlarge

Continue reading the full article at Seeking Alpha here.

Jeremy Grantham's Full December 2011 Quarterly Letter

JGLetter_ShortestLetterEver_3Q112

Euro Reading Roundup - Who Will Be Getting Booted Out of the Eurozone?

Or perhaps the more important question is which country will be the first to experience a a more serious bank run than the slow motion runs which have been occurring in Greece, Ireland, and Italy?

1. Departures from the Eurozone are "inevitable" (Rodrik)

2. Europe's Darkness at Noon (Eichengreen)

3. Thinking Through the Unthinkable (Wolf)

4. 'In 31 years, I've never seen markets this crazy' (Jim Cramer)

5. Wall Street Ignoring Europe? (Tim Duy) Smells like 2007

Guest Post: Investing Simplified for Senior Citizens

Investments for senior citizens are no different than those made by a person of any age; however, it may be in their best interest to make investments with low risks since many are retired and are on a fixed income.  Here are some typical investments:

Stock Investments- You buy an equity ownership interest in a publicly traded companies. The price of a stock can fluctuates; as it fluctuates investors either make or lose money on their initial investment.  Stock prices can be unpredictable and risky but has the potential for very high returns if you invest smartly. Some stocks also pay dividends, although the amount of the dividend can be changed by the company.

Stock Mutual Fund Investments- You choose a manger and they invest your money into diversified set of assets. Mutual funds are available for stocks, bonds, short-term money market instruments, and other securities. A mutual fund can less risky than investing in a single or small number of companies due to diversification. However, fund fees can reduce the total investment return.

Savings Deposit Investments- Deposits you make into your savings account with your bank.  Money must be moved into your checking account for use.  While in your savings account, your bank pays you interest based on current interest rates and your money is insured by the FDIC up to $250,000 per despositor, per insured bank.

Certificate of Deposit Investments (CD)- You deposit a fixed amount of money for a fixed amount of time into account with a bank or thrift institution.  Once the maturity date is met, your bank pays you back your initial investment plus any interest you accrued. Bank CDs are also often covered by FDIC insurance.

Treasury Bill Investments (T-Bills)- Short-term debt sold by the U.S. Treasury, usually at a discount from the par amount, i.e. amount the bill will be worth upon maturity. For example, you might buy multiple bills for $98 and get $100 for each when the bills mature at a later date; the lowest bill you can buy is worth $100 upon maturity. Treasury Bonds are longer-term debt sold by the U.S. Treasury for periods up to 30 years. The Treasury also sells Treasury Inflation Protected Securities (TIPS) which have feature and adjustable coupon payment based on the changes to Consumer Price Index.

Money Market Account (MMA) or Money Market Deposit Account (MMDA) Investments- A deposit account offered by banks.  Upon deposit, your bank will invest your money into government and corporate securities. You will be paid interest based on current money market rates of interest.

Money Market Mutual Fund Investments- A deposit fund offered by brokers who invest your money in short-term government and corporate debt securities. This investment is very similar to MMAs except that they are through a broker and not insured; they are more risky than MMAs, but you may receive a higher rate of return on your investment.

Below is an easy to read chart for senior citizens; it lists general details about these investment types.

Shannon Paley is a guest post and article writer bringing to us her simplified explanations on investments for senior citizens. She writes about nursing home abuse for nursinghomeabuse.net.


Note: please see the Disclaimer on the right side of this website. Before considering any investment you are encouraged to consult with a professional investment advisor.

Video: Kyle Bass on the Worldwide Problem of Too Much Debt

Link to Kyle's video presentation here.

Kyle, btw, is the protagonist in Michael Lewis' latest book, Boomerang. Zerohedge has posted some of the highlights about Kyle from the book here. 

Video: Jim Chanos - China Real Estate Meltdown in the Early Innings

Video after the jump:

Video: Pimco's El-Erian Explains Financial Repression

Video: Niall Ferguson on the Likelihood of a China Hard Landing

Video after the break.

QOTD from World's Largest Currency Trader, John Taylor: "The euro is going to hell"

Here are some other highlights:

So why should the U.S. dollar appreciate in such a horrid environment? As the world's reserve currency, Taylor says, the dollar has become a reverse indicator of the globe's economic health. "Whenever things are good in the world, [the] currency goes down," since there's ample liquidity. But when the rest of the globe is doing poorly, there's no liquidity and therefore the U.S. dollar is worth more. "That is the most important thing to know about foreign exchange nowadays–it is kind of backwards," he says. 

Greece's default is more a matter of when than if, he says, as the Greek citizenry won't support the austerity measures necessary to stay in the euro zone. There will be a referendum this autumn on some of the recent changes, and the outcome could upend the fiscal cuts already decided upon, Taylor warns. 

He now sees the euro trading between $1.37 and $1 over the next 18 months—nearer to the top side "if the Fed does its best at ruining our currency, and the euro manages to survive somehow." The world is pretending the European debt crisis is fixed, he adds—necessary if you are trading short term, but "long-term, a debt deal isn't going to work. The euro is going to hell. Every time they do things to fix it, it gets deeper and deeper." 

Are there any other currencies worth paying attention to? Taylor is positive on the commodity-based ones, such as the Australian and New Zealand dollars, despite their run-up. "We use commodities to forecast currencies," he notes. For instance, Norway's krone is a function of the price of oil, which he thinks is a solid long-term bet on the next growth cycle. In five years, he says, "we could see oil at $500 a barrel. I would be a buyer on dips of oil." 

Among Taylor's influences is the 1991 book, Generations, by historians William Strauss and Neil Howe, which identifies longer-term cultural and demographic cycles in American life. "Every 80 years, we go through a deleveraging cycle," he says. "It's hard to measure, but that's where we are now. It has to do with the period 2010-20, compared with 1930-40." The so-called Millennials, who were born between 1980 and 2000, "will be the ones to save us, but they'll have no money, no entitlements," says Taylor.

Full article here. 

Is the Bernanke Put Kaput?

As Barry suggests, have we just seen the end of the Bernanke put? Based on the way markets are trading today it would appear Ken Rogoff was right that Bernanke doesn't have the stock market's back.

However, in all likelihood Soros is right about how policymaking powers-that-be will be forced to bailout Too Big To Fail banks should the financial system begin to teeter again. In which case the only real question is for how long can the current central bank shell-game be sustained in a low-to-no growth economic environment?

No one -- not Ben Bernanke, not Alan Greenspan, not Milton Friedman if he were alive, nobody -- knows for sure just how much more room the Fed's balance sheet has before non-negligible inflation kicks in. However, former Fed Chair Paul Volcker for one is starting to get nervous.

Federal Reserve Total Assets ($s Trillions)

(click to enlarge)

Continue reading the full article at SeekingAlpha here.

Video: Soros (Best Case Scenario) 2-3 European Countries Default/Leave Euro

And oh btw, the U.S. has probably already entered a double-dip recession.

But the good news, according to Soros, is that government authorities have learned from Lehman and will bail out Too Big to Fail firms when the system collapses again. In other words, the so-called 'Bernanke put' is not kaput.

Video: Jim Chanos' Latest Thoughts on China

Video: Ray Dalio Not Optimisitic About Orderly Eurozone Resolution

Video: Jim Rogers on Greek Default, Operation Twist, SNB Intervention & Why He's Shorting Equities

Rogers on how "Bernanke has been lying to us again" and other thoughts on what's happening right now and where he's investing.

End Game: Greece to Default This Weekend?

While the Greek government is publicly denying it (I suppose they have to until the banks close) the game appears to be up (further confirmation from Spiegel here).

The timing of the default would come roughly in line with my prediction. We're also seeing a softening in the euro, now down to $1.36, also as predicted.

In terms of what happens next, the first step following default would likely be a bank holiday in Greece. This would then be followed by some type of devaluation (rumoured to be around 50%) of the reintroduced drachma.

As I posted yesterday, anyone in Greece who still has their euros in a Greek bank may want to move swiftly.

Here is Professor Eichengreen with some deeper perspective and why its likely the ECB is going to be doing a lot of Ctrl+P.