Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely –but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode.

Finish reading the complete article at The Daily Reckoning.

Last Thursday, ratings agency Fitch dropped the Golden State’s credit rating to A-minus and immediately placed that on negative credit watch. California shares three major problems with the US. It faces:

1. A crippling budget deficit
2. Declining tax revenues
3. A legislature that won’t face up to critical issues.

Over the weekend, we read in wonder that by the non-partisan Congressional Budget Office’s own estimation America’s national debt is now growing so quickly that it will exceed the size of the economy in 2023 – seven years earlier than the projections of the last report just 18 months ago!

This from The Caucus, the politics and government blog at the New York Times:

The culprit is not the huge sum of stimulus spending that President Obama and Congress have injected into the economy this year, the budget office said. Instead, rising health care costs and an aging population together continue to push government spending upward at an unsustainable pace, only faster than the budget office last estimated. […]

“The current recession has little effect on long-term projections” of government spending and revenues, according to the budget office report, and the deficit-financed stimulus programs can “help the economy return to full employment.”

“Debt soars because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending” as a share of the economy, the report said. Up to 90 percent of the increase is due to Medicare and Medicaid spending rather than Social Security, it added.

This is serious stuff. But few in the mainstream media seem to think so. Of course, the problem of too high a national debt burden is nothing new. Scottish-born, American steel magnate and philanthropist Andrew Carnegie highlighted the danger of national debts in his 1886 book Triumphant Democracy.

In Carnegie’s day, it was Europe – and particularly Russia – that suffered the most from indebtedness. Ironically, Carnegie believed that America’s democracy had saved the country from such burdens.

National debts grow troublesome. Year after year the burden they lay upon the productive energies of nations becomes harder and harder to bear. The twelve years between 1870 and 1882 have eclipsed all others in the amounts added to the already sorely burdened masses of Europe.

Russia has saddled herself with $1,365,000,000 (₤273,000,000) more debt in these short twelve years, an average increase of nearly $115,000,000 (₤23,000,000) per annum, a load fit to weigh an empire down. France’s obligations have swollen to $2,215,000,000 (₤ 443,000,000) and even Spain must be in the fashion and add $525,000,000 (₤105,000,000), and Italy, not to be behind in this mad race, has contracted $740,000,000 (₤148,000,000) more, and even poor decaying Turkey has found credulous capitalists to lend her $90,000,000 (₤18,000,000) during this period.

The aggregate of these obligations in Europe has increased, since 1848, from $14,940,000,000 (₤2,988,000,000) to $20,935,000,000 (₤4,187,000,000), and most of this increase has been consumed in wars which have left matters much as they were or would have been, if never waged. […]

Perhaps the Democracy is soon to awaken to the truth that these vast accumulations of debt have their real source in the rule of monarchs and courts, whose jealousies and dynastic ambitions, stimulated by the great military classes always created by them, produce the wars or continual preparation for wars which eat up the people’s substance and add to their burdens year after year. A nation with a large standing army and navy is bound to make wars.

Washington and its allies at the Federal Reserve are pinning their hopes for an economic ‘recovery’ on the twin policies of fiscal and monetary stimulus.

That this is more the stuff of mad science than of sound economic policy has not (yet) dented the strained optimism of the new administration. Nor does the radical nature this massive borrow-and-print operation seem to have percolated through to “Joe Public.”

Underground investors need to understand the problems involved with these so-called ‘solutions’ if they are successfully determine the economic outlook. As Doug Wakefield and Ben Hill of Best Minds, Inc. put it, “We have been brainwashed to believe that if only rates are low enough, eventually individuals and business owners will borrow money like crazy again.”

What most central planners fail to understand is the difference between policy decisions (such as the spend-and-borrow approach to economic recovery) and people’s reactions to those decisions. As Wakefield and Hill put it:

For monetary policy to be effective there must be many people in the private sector who respond to the central bank’s cuts in interest rates. In other words, there should be many people who are induced to save less, to buy a home, or to invest in plant and equipment in response to the lowering of interest rates by the central bank. It is only when the reduced savings or newly borrowed money is spent that income is generated for the next person and the economy moves forward. In other words, it is not lower interest rates per se that improve the economy, rather it is people’s reaction to lower interest rates (that is, borrowing money to spend or saving less) that improves the economy.

When the balance sheets of corporations are impaired, however, they are likely to make paying down debts their top priority. For those companies, borrowing money is the last thing on their mind. When the vast majority of the companies in an economy are in this category, however, the whole economy ceases to respond to the lowering of interest rates by the central bank.

So with the hundreds of millions the world’s leaders continue to spend in economic and financial stimulus to try to make the debt-addicted take on more debt, the answer is simple. It is wrong.

This is not an argument that goes down well with the financial wizards who manipulate the US economy supposedly in the people’s best interest. As underground investor and CEO and founder of Credit Risk Monitor, Jerry Flum, points out:

At the end of the day, here’s what they are trying to do: we’ve got the American consumer, with no savings and who has, for the most part, been wiped out in real estate – because if he has a $160,000 mortgage on a house he purchased for $200,000, but is now worth $160,000, he has very little, if any, equity left in the house. And to top it all off, his 401k and his pension and everything else is down 30 to 40 percent.

So, this consumer has no savings; his assets have shrunk, and the President of the United States, and everybody, has an economic policy which, for the most part, is trying to force banks to lend money to that consumer, so he can go out and buy another TV set or another car.

It’s ethically and morally bankrupt, and it’s an atrocious policy for our government to try to get that person to borrow more money to consume when that person should be saving. It’s insane. The fundamental policy of the government is to come in and get the banks to lend to a consumer, who represents 70 percent of the GDP, who’s nearly busted… you know, sometimes I wonder if I’m on the same planet with everybody.

In sum, there are three dangerous trends that all serious investors should come to terms with before investing a single dime in the markets (hat tip, Best Minds, Inc.).

1. Government leaders, as a whole, have become more subservient to those in control of money, resulting in ever-faster exploding debt.
2. Due to a rapid expansion of government inefficiencies and the political corruption that goes hand-in-glove with misusing perceived “unlimited power” to appease and please, rather than to lead, the economic and financial systems show more signs of instability today than they did two years ago.
3. The crowd, by and large fearing the hardship that will accompany any real remedy, desires to remain uninformed so long as their personal lives are not affected. While things looked bad in the fall of 2008, as equity prices fell around the world, the rise of the same, since that time, has comforted the crowd and lulled many back to sleep.

Asia, unlike major Western markets, already suffered from an economic depression in 1997-1998 as country after country was sucked into a massive currency and debt crisis smashed into the region.

Asia’s quick response to the crisis – mainly thanks to China – combined with easy credit financing from the West helped to lessen the severity and duration of the blow.

Currently, the FTSE Asia-Pacific Large-Cap Index (excluding Japan) yields 3.8% while the Tokyo Nikkei yields 2.7%. Both sectors yield more than local government bond markets.

The S&P 500 Index currently yields 3% or slightly below the yield on benchmark ten-year Treasury bonds.

Amazingly, Japanese stocks barely yielded 1% for years until the Nikkei began to hemorrhage starting in 2004. Since then, many Japanese large and small-cap companies have boosted dividends over the last five years, including share buybacks.

Some world-class companies in Japan continue to pay attractive dividends, including Canon (3.4%), Nintendo (5.5%), Nippon Oil (3.6%) and Takeda Pharmaceuticals (4.8%).

What’s truly amazing is how for many decades the United States continued to raise dividend payouts while emerging markets paid little or nothing to shareholders. Now that trend is changing amid the worst credit deflation in 75 years…as banks and other companies chop or eliminate dividends to conserve cash.

Dividends in the MSCI Asia Pacific Index are derived from companies in 14 countries with the top ten dividend-paying stocks accounting for about 20% of total dividends paid. In contrast, the top ten dividend stocks in the S&P 500 Index accounted for almost 33% of all dividends paid by that index in 2007.

According to research compiled by the Matthews Asia Pacific Equity Income Fund, between 2002 and 2007 dividends paid by the constituents in the MSCI Asia Pacific Index grew at a compounded annualized rate of 24% compared with 10% for the S&P 500 Index. That trend is accelerating since 2008 as Asian stocks maintain or boost payouts while American companies reduce or eliminate them altogether.

At some point in the future, it’s inevitable that currencies in Asia will be revalued vis-à-vis the American dollar. That makes dividend investing in the Pacific even more compelling as the total return equation grows more rewarding for long-term investors.

Source:  Increasing Dividends, Higher Total Return Mean Asian Equities Might Be Worth a Look

“What if the crisis of 2008 represents something much more fundamental than a deep recession?” he asks.

So he’s just now figuring this out.  Well, when the family fortune you marry into shrinks from $3.6 billion to a mere $25 million, I guess it’s natural to start wondering such things.

But since it’s Tom Friedman we’re talking about, it’s also natural to reach the wrong conclusions.

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese …

We can’t do this anymore.

Yeah, I know — I too had to read it a couple of times so I could follow the logic, such as it is.

Is Friedman saying the whole globalization model as he’s portrayed it for the last couple of decades is falling apart?  Not that he would admit that, of course — “We’ve always been at war with Eastasia!”

Note too how he writes with the conviction of the converted.  I suppose if the family fortune you marry into has shrunk by more than 99 percent, and that family fortune is based on shopping malls , and you’re already of a world-improving mentality, it’s natural to adopt an outlook that meshes the worst of consumer-culture contempt and climate-change hysteria.

It is also natural in light of those circumstances to be utterly blind to the real causes of the crisis.  He writes about China’s purchase of Treasuries as if it were a phenomenon in isolation.  There’s zero acknowledgment that what we face is a debt crisis — a crisis of excess credit fomented by the Federal Reserve that metastasized through the financial system and then the wider economy.

Friedman actually quotes an expert who says, “We have not generated real wealth,” without realizing what’s actually happened in the 20 years he’s been extolling the virtues of globalization (as he defines it):  The art of money-shuffling was elevated above the craft of producing real goods that people can use.

No matter.  Friedman speaks for the Davos crowd he’s hung out with the whole time that’s managed to screw things up so royally.  And their message now is:  Suck it up.  Learn to live with less.

You know, I think most people are probably able to figure that out without Tom Friedman’s help.  But he’s bound and determined to help anyway.

Source: The Conviction of the Converted

Then the article gets right in our American faces and keeps hammering at us: “Statistics show that America’s internal and external debt exceeds $60 trillion, over 400% of the country’s annual GDP of a bit over $14 trillion. Of that total, family debt (including mortgages), financial and non-financial firms’ debt, and municipal and national debt come to about $15 trillion, $17 trillion, $22 trillion, $3.5 trillion, and $11 trillion, respectively, though it is hard to tell how these debts have been split up among foreign governments, financial firms, companies, and individuals.”

Naturally, as a proud American, I take the aggressive approach and sneer, saying, “So? Tell us something that we don’t know! Hahaha!” ??

In an apparent response, he goes on, “To relieve the crisis, the US must repay its debts, and to do that it needs to live a more frugal life instead of asking others to continue lending it the money to maintain its over-consumption.”

So, still being a smug American, I say, “Says who? You? Hahaha! We’re Americans, and we have a fiat currency, and we can just print up all the money to pay you off! And everybody else, too, suckers! How do you like them apples? Hahaha!”

Apparently, Xiang is unimpressed with my typically American solution to the debt problem, as with all problems, and continues, “The first thing the government needs to do is reduce spending and the deficit. Correspondingly, the US needs to cut military disbursement, stop its global expansion and the robbing of oil resources from other countries.”

Again, I am instantly indignant, and my anger shows through when I say, “Hey! Deficit spending like profligate morons while running around the world taking what we want and killing anybody that gets in our way characterizes The American Way! You are proposing to destroy our native culture, you insensitive, genocidal, racist bastards! I’ll sue you all!”?

Apparently, even Chinese people know that I am just a big blowhard, and instead of insulting me and calling my bluff, we are given some sinisterly interesting advice – namely, “Families and individuals should stop anticipating their income to buy houses and travel globally. Instead, they should warmly welcome foreigners to travel to and spend money in the US. “

Boinggggg! Proving once again that being a paranoid lunatic has its upside, I am able to instantly decipher this to mean that the “Secret Chinese Plan” is for us to sell them everything we have to pay our debts, and then act as courteous hosts and hostesses as they travel the country, inspecting their vast holdings and indulging in various, ummm, indulgences involving our women-folk and enslaving us all on vast rice and pig farms where we will be given pork-fried rice to eat, as much as we want, which is the only upside to this whole mess, as far as I can see.

And these Chinese may be onto something with this commodities thing, because I am betting that commodities will be soaring from here on out, as Dailytech.com reports that “All four major global temperature tracking outlets (Hadley, NASA’s GISS, UAH, RSS) have released updated data. All show that over the past year, global temperatures have dropped precipitously.”

The article goes on with the specifics, namely that “The total amount of cooling ranges from 0.65C up to 0.75C – a value large enough to wipe out most of the warming recorded over the past 100 years. All in one year’s time. For all four sources, it’s the single fastest temperature change ever recorded, either up or down.”

This explains the subhead: “Twelve-month long drop in world temperatures wipes out a century of warming”, although it does not explain why such a momentous piece of news does not have at least one exclamation point! Hell, I’d give it two, and I don’t know anything about it!

The Bad, Bad News (BBN) is not just that this kind of poor punctuation is rampant, but that this abrupt dropping of global temperature has a nasty habit of portending “little ice ages”, and this, along with the mysterious and ominous disappearance of sunspots, has me running outside, yelling at some kids playing down the block, “Hey! You stupid kids! Run home and tell your parents that they should be buying gold, silver, oil and commodities of all kinds because crop yields in the future will be catastrophically low, and if they don’t, then they are stupid! And when they don’t follow your advice, you can remind them a few years from now about how you warned them, but they were too stupid to listen to you, which is what all parents like to hear from their teenage children! Hahahaha!”

Well, I hope they do, not that it will do any good, but at least I made their children a little more obnoxious, which makes me smile in smug satisfaction.

And I bought some more commodity plays, which made me smile ditto! Whee! This investing stuff is easy!

Source: Finance…the American Way

But there are currencies that have actually been falling against the green back. My guest today is Sovereign Society’s currency expert and editor of the Money Trader, Jack Crooks.

The dollar has plummeted in Europe and Japan. But it has actually gone up in many countries, such as South Africa, Indonesia, Iceland, South Korea, Argentina. What is the reason for the decline in these currencies?

Jack Crooks: You’d think by reading the news that the dollar has fallen against everybody, but the lowly green back has appreciated against some of those countries. The reasons vary. Iceland is a financial crisis and I think South Africa has a political problem. So you have different reasons for these falls against the dollar in these countries. And you have to get beneath the surface to see.

It goes to show that currencies aren’t always a one-way bets. No matter how bad a currency may look, it may be appreciating against something else.

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American Debt Crisis Set to Implode

Ben Bernanke is just DAYS away from unwinding the world’s biggest bet – and his actions could spin markets into a “deflationary, global collapse.” To learn his dirty little secret – and grab potential gains of 319% or MORE, read Jack Crooks’ latest report.
___________________________________________________________

Laura Cadden: I was especially surprised to see the South African rand dropping 26 percent against the dollar in two years. Yet they’re one of the major gold producers of the world. How do you explain this situation?

Jack Crooks: That’s an odd one, especially if you look at the price of gold, as you said. It almost runs completely inverse to the dollar. If gold goes up, the dollar goes down. So you sure would expect the South African rand to go up as. But I think that’s a real political problem there:

The South African government really is shifting more from capitalism to a very socialist economy. They’re having power outages and you’re just seeing a real breakdown in a lot of the key factors that drive an economy. The political side is scaring a lot of investors out of South Africa. And since currencies are driven by money flow, if money is moving out of South Africa, its currency is going to fall.

Laura Cadden: Let’s talk about Iceland. The krona has slumped 26 percent against the Euro this year and it’s down 40 percent since mid-July 2007. What do you think is the big factor there?

Jack Crooks: Now Iceland is a financial fix. There’s a real banking crisis going on in Iceland because Icelandic banks borrowed a lot of international money from Norway, Denmark, Sweden, the European market.

Then we had the credit crunch. Then all of a sudden they couldn’t get the funds to refinance these credit lines. It fed directly into the currency.

There’s no free lunch: A lot of small investors were putting a lot of money in the Icelandic currency because the interest rate was so high. They thought they could earn ten, 15 percent in Iceland interest rates versus three percent in the United States.

There was a reason interest rates were so high in Iceland: Because there was a lot of risk. The currency fell off the table because of that risk when it came to fruition.

Laura Cadden: Iceland hiked their rates up to 15.5% in part because they were battling inflation of 11.8 percent. Can you imagine yields of inflation like this to a U.S. investor. I mean that’s just crazy.

Do you think it’s going to continue? The krona’s going to continue to decline?

Jack Crooks: Well, recently the banks of Norway and Sweden have come in to try and open up credit lines and really save the currency to a degree. This is a real emergency for Iceland.

As you said, it’s really a double whammy. It’s not only financial, but you have that inflation problem in the background. You also have the situation where their economy is starting to slow down. It’s bad news at the moment. So we really need to see how this shakes out because if we have another bout of the credit crunch globally, it’ll continue to feed into Iceland and I think will continue to hurt the currency.

Once we get through this credit problem and if the banking system is stabilized in Iceland I do think it’s going to be a great buy.

Laura Cadden: So are there any opportunities for U.S. investors to leverage this situation for long-term gains?

Jack Crooks: As I said, I think Iceland is going to turn around because the economy ultimately is stable. They just got over-extended on this credit crisis. So I think that would be a nice long-term play, but we want to see some consolidation technically there.

In other places there are a lot of emerging opportunities. Emerging markets all present opportunities—big risk, but the reward is there if you’re willing to take it.

Source: Currency Trading Strategies for a Volatile Forex Market

It is widely regarded that such utterances, if repeated often enough, can constitute the sum total of what is still laughingly known as the nation’s “strong dollar policy.”

Over the past two generations, the American government has launched many failed campaigns. There has been the war on drugs, the war on poverty, and the continued attempts to improve education. But the “strong dollar policy” must be seen as the poster child for all failed Federal policies.

Many in the market took cheer that the policy is now being greatly expanded. In an unprecedented move, the Fed Chairman is now adding his voice to the chorus and using the same rhetoric previously used by Treasury alone. That’s two people saying the words…not just one:

A double-barrel strong dollar policy!

As the administration is so fond of saying, a nation’s currency reflects the underlying strength of its economy. In that sense it can be seen as a nation’s economic report card. In truth, a strong currency is in the interest of every nation, just as good grades are in the interest of every student.

___________________________________________________________
URGENT WARNING: American Debt Crisis Set to Implode

Ben Bernanke is just DAYS away from unwinding the world’s biggest gamble – and his actions could spin markets into a “deflationary, global collapse.” To learn his dirty little secret – and grab potential gains of 319% or MORE, read Money Trader Jack Crooks’ latest report.
___________________________________________________________

A flunking student cannot improve his grades by simply telling his parents and teachers that he has adopted a “straight A policy.” If his words are not accompanied by a change in actual behavior, his new policy is unlikely to achieve results. As long as his bad habits persist, the policy will not be any more effective simply because one of his friends chimes in.

In his speech this past Tuesday, Ben Bernanke finally admitted that the weakness in the dollar was contributing to both higher inflation and elevated inflation expectations. This stands in stark contrast to his recent testimony in front of the House Banking Committee, where in response to a question asked by Congressman Ron Paul, he confidently declared that the weakness of the dollar only effected Americans who travel abroad. It is amazing how little attention this complete reversal received.

The media of course wasted no time in declaring that Bernanke’s speech heralded the opening of a new front in the campaign against the falling dollar. For example, CNBC’s Larry Kudlow proclaimed that Bernanke had endorsed “King Dollar” (someone needs to remind Kudlow that the king has long since abdicated his throne) and the network ran an entire segment on how to profit from the new dollar rally. All of this because Bernanke merely mentioned the dollar, acknowledged its effects on inflation, and expressed concern for its plight. As far as the media and Wall Street are concerned, words without action are enough. Too bad that’s not the way things work here on the planet Earth.

The real take away from Bernanke’s comment is not that the dollar is about to rally, but that it is now more likely to sink even lower. I believe the main reason Bernanke has refrained from mentioning the dollar in the past is that he did not want to be put in a position of actually having to do something about its decline. He is now so fearful of an imminent dollar collapse that he must have felt compelled to throw down the gauntlet despite his fear that someone might actually pick it up.

My guess is that currency traders will ultimately see this as an act of desperation. When the dollar keeps falling a chorus will swell to demand that the Fed put teeth in its new policy. If Bernanke does nothing the world will finally see a naked emperor and the dollar’s decline will turn into a rout. If, on the other hand, the Fed raises rates to defend the dollar, and only a short term bounce results, then all remaining confidence in the Fed’s ability to support the dollar will evaporate as well. This is probably Bernanke’s greatest fear and is likely the main reason he waited so long before mentioning the dollar. The fact that he felt compelled to do so now likely means he knows the game is coming to an end.

Source: Dollar Bear Torpedoes the Fed’s ‘Strong Dollar Policy’

In that ad hoc comment, we wrote: “The crux of the thesis of our latest book, The End is Not Nigh, is simple and goes something like this: a) Asian central banks continue to manipulate their currencies and prevent them from finding a fair value against either the US$ or the Euro b) this manipulation triggers an accumulation in central bank reserves which, in turn, leads to low real rates around the world c) the combination of low global real rates and low Asian exchange rates amounts to a subsidy for Asian production and Western consumption d) in the US, the subsidy has by and large been captured by individual consumers e) meanwhile, in Europe, the subsidy has been cashed in by governments whose debt has skyrocketed f) we see little reason why, in the near future, the subsidy should be removed but g) if it were removed, the US would most likely encounter a consumer recession (not the end of the world) while h) Europe could go through a debt crisis (far more problematic).”

We went on and wrote: “Last week, and against most observers’ expectations, the Indian central bank did not raise rates at its meeting. Instead, it seems that the authorities are allowing the currency to rise and hopefully thereby absorb some of the country’s inflationary pressures (linked to energy and higher food prices). In recent weeks, the rupee has shot higher and now stands at a post-Asian crisis high. And interestingly, the local market is loving it. While Indian stocks had been sucking wind year to date, the central bank’s apparent policy shift (from higher interest rates to higher exchange rates) has triggered a very sharp rally.

This of course is an interesting turn of events and we would not be surprised if Asian central banks were to study developments in India carefully over the coming quarters. After all, India is blazing a path that a number of Asian countries may yet decide to follow.

One could argue that a change in monetary policy in Asia could end up being a “triple whammy” for Western economies. It would mean that:

• Asian central banks would export less capital into our bond markets and this would likely lead to a drift higher in real rates around the world.
• Asian exchange rates would move sharply higher, which in turn would likely mean higher import prices in the US and Europe.
• As Asian exchange rates start to move higher, Asia’s private savers would likely start repatriating capital, further amplifying exchange rate and interest rate movements. This would also likely lead to collapses in monetary aggregates in the Europe and the US.

Finally, we concluded the paper by saying: As we highlighted in Part 1: Why We Remain Bullish, we are not worried about valuations. And we are also not worried about “excess leverage” in the system, or the threat of a “private equity bubble”. We also do not fear an “economic meltdown” or a brutal end to the “Yen carry-trade” (which we did fear in the Spring of 2006). Instead, if we had to have one concern, it would have to be a possible change of monetary policy across Asia and the impact that this would have on real rates around the world. As we view things, the only reason Asian central banks would change their policies is if food prices continued to increase (in that respect, owning some soft commodities — a hedge against rising real rates — makes sense to us – as does owning Asian currencies). Interestingly, such a turn of events seems to be unfolding in India, yet no one seems to care. Monitoring changes in Asian inflation, monetary policies and exchange rates could prove more important than ever.

Nine months after that paper, we have indeed just gone through a period of a) rapidly rising food prices which have led to b) faster inflation rates across Asia, which have triggered c) a change in Asian monetary policy, notably a willingness to let the currencies appreciate faster than they have in the past. And if Asian central banks are now finally allowing their currencies to rise, then one thing is sure: Asian central banks will no longer need to print large amounts of their own currencies and accumulate US$ and Euros. They will thus also no longer need to buy US Treasuries and European bonds to the extent that they have.

Is it a co-incidence that, as Asia starts to allow its currencies to rise, US mortgages have been hitting the wall and spreads amongst European sovereigns have started to widen? The subsidy that Asian central banks have been giving to consumption in the US and governments in Europe (see The End is Not Nigh) is now disappearing.

Indeed, for the past five years, spreads of Italian ten-year government bonds to German bonds have hovered between 15bp and 25bp. But recently, spreads have started to break out on the upside.

And, of course, Italy is not alone. All across Europe, we have seen a widening of spreads between the “stronger” signatures (Germany, Holland, Austria, Finland, Ireland) and the “weaker” signatures (Portugal, Italy, Greece, Spain, Belgium, France) including those of Eastern Europe (Latvia, Romania, Hungary, Poland…).

It seems the Federal Reserve and other global central banks have successfully tempered the credit crisis since mid-March. The Fed’s effective bailout of the now defunct Bear Stearns created a floor under the sub-prime wreckage.

The good news is that a host of high-risk credit indices have posted big rallies over the last eight weeks. That includes a blizzard of new fixed-income issues as companies return en masse to fund their operations.

But don’t get too excited…The debt crisis is far from over.

LIBOR Rates Barely Budge Lower

While several indicators have improved recently, other important sources of funding remain under pressure. This tells me the sub-prime crisis is now spreading from the mortgage-backed securitization market to consumer installment debt.

Also, inter-bank lending rates have yet to fully recover from their pre-July 2007 levels while bank credit is contracting, not expanding – an ominous sign as the United States struggles to escape a slowdown.

Three-month London Inter-Bank Borrowing Rates (LIBOR) has barely budged since the Fed rescued Bear Stearns. The majority of financial institutions continues to hoard cash and refuses to trust overnight lending facilities.

The Main Sub-Prime Fear Factor:
Overnight Lending Rates Barely Move

While it’s safe to assume that some areas of the credit markets have not stabilized, other areas of the credit markets have indeed started to breathe easier. Among those normalizing this spring is the sub-prime market.

Sub-prime is Finally Tamed

According to Fitch, the international credit-rating agency, banks have probably written off approximately 80% of their bad loans through mid-May.

It’s not over for every bank. Some banks, including Switzerland’s Union Bank of Switzerland (UBS) continue to surprise the markets on a weekly basis with a host of spectacular losses tied to real estate, sub-prime, leveraged loans, and auction rate securities.

But for the most part, however, the sub-prime crisis is past its inflection point. What matters now is how and when other credit indicators normalize.

As of yesterday, the sub-prime crisis has resulted in approximately US$200 billion worth of write-downs for global banks. The lion’s share of those losses came from UBS and others in the United States and the United Kingdom.

For the most part, Asia and Latin America have escaped the crisis. Their banks remain highly liquid compared to their peers in North America and parts of Western Europe.

The securitization model (aka rolling sub-prime mortgages into securities and selling them) is still alive and kicking overseas, but it was NOT a primary investment source for Asian and Latin banks. Therefore these savvy banks avoided most toxic sub-prime products like collateralized debt obligations or CDOs.

Credit Spreads Narrow

As I continue to track the normalization of credit markets, I’m encouraged by the narrowing credit spreads across several markets – a bullish development.

One key indicator I follow – the spread between three-month Treasury bills and the three-month LIBOR – has narrowed considerably since March to 0.85% from 1.83% back in early April.

That tells me that the “safe haven” trade on short-term Treasury bills since the sub-prime crisis first erupted last summer is reversing. It also means that risk is gradually returning to the credit markets. Prior to mid-April, three-month T-bills plunged way below the Federal Funds rate to a low of 0.81% – severely overbought as investors scrambled for safety.

Another bullish indicator now flashing green is the yield spread between 30-year municipal bonds and 30-year Treasury bonds.

Prior to mid-March, the yield differential between 30-year municipal bonds and long-term T-bonds ballooned to their highest in history as investors fled municipal debt. The average yield on high quality municipal bonds has plummeted 70 basis points (0.70%) after reaching a peak on February 29.

Earlier last winter, as yields soared, savvy investors like Bill Gross of PIMCO and venture capital investor, Wilbur Ross, scooped-up those fat yields. In hindsight, that was a great speculation as yields have plunged versus T-bonds.

Also, some mortgage and financial companies, including non-financial issuers, are successfully raising capital again since April. Though financing remains much more expensive compared to 12 months ago, it’s nevertheless a positive development for global capital markets.

Beware of High-Risk Debt Markets

High-yield bond indexes and preferred securities have also rallied since late March.

Preferred securities, which provide stock and income-like features, have also rallied. But financial service companies that most issue these preferred securities and write-downs are far from done. I would avoid preferred securities and those juicy, but dangerous yields.

The same is true for high-yield bonds and other busted credits, including sub-prime securities as the economy continues to slow.

High-yield or junk bond defaults remain historically low at just below 2% of all outstanding issues. Previous recessions have seen defaults surge almost three times this level.

In my view, the recent rally is nothing more than a dead-cat bounce. More junk bonds will default over the next 6-12 months.

The Next Credit Crisis: Consumer Installment Debt

I’m still highly dubious that credit markets have bottomed. Sub-prime is now largely history. But other segments of the credit spectrum that have a far more profound impact on the American consumer are just beginning to unravel.

The consumer is now threatened by a liquidity crisis. Housing values continue to heavily contract and revolving credit installment debt is becoming harder to secure.

The culprit is less the write-downs themselves and more the virtual “shutdown” in the securitization market. At its height, the securitization market provided 66% of household borrowings in the first quarter of 2007. Without this market, consumer credit losses may be far worse than currently estimated.

Auto loans, personal loans, mortgage loans, and other segments of installment debt are still contracting. Auto loans are especially vulnerable with defaults recently hitting a 10-year high of 3.4% in March. And more Americans are dropping their house keys to their local lenders as housing values continue to plunge below the cost of their mortgages.

Consumer deflation has arrived at the absolute worst time as savings rates are barely positive. Soaring energy and food prices, declining home values, surging auto delinquency loans and gradually rising unemployment depict a growing liquidity crisis now underway for the consumer. Also, most, if not all, installment debt is structured to finance domestic consumption. It’s not a pretty picture.

Stay defensive and avoid most debt markets, except high quality short-term Treasuries and investment-grade bonds. The consumer credit bear-market is underway.

ERIC ROSEMAN, Investment Director

EDITOR’S NOTE: As of today, our Sovereign Society research team is working on a special report to give you the information you need to protect yourself from this second coming of sub-prime – when it hits the real economy – including your personal credit report. Please look for this special report coming to your email inbox this weekendSource: Is Sub-Prime Finally Over? Yes and No

Source: Is Sub-Prime Finally Over? Yes and No

It was Dr. Goebbels who observed: “Propaganda has only one object; to conquer the masses. Every means that furthers this aim is good; every means that hinders it is bad.”

Fear was the Nazi stock in trade. They used fear as a potent psychological weapon in their efforts to direct and control the German masses.

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American Debt Crisis Set to Implode

Ben Bernanke is just DAYS away from unwinding the world’s biggest bet -

and his actions could spin markets into a “deflationary, global collapse.”

To learn his dirty little secret – and grab potential gains of 319% or MORE,

read Jack Crooks’ latest report.

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And each year, as dependable as the arrival of spring, the fear mongers at the IRS launch into their annual campaign to scare the American public.

IRS Loopholes: The annual campaign

The annual campaign begins with a barrage of press releases. The PR specialists at the IRS start sending them three months before the annual income tax filing date, April 15th (a week from today). The press releases are more than just friendly “please file your taxes” reminders. They announce (or you could say, “brag about”) the convictions of an assortment of alleged tax evaders. This scare tactic has become a ritual to frighten U.S. taxpayers into paying up. Read on to learn this year’s IRS propaganda tactics.

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