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Bonds & Interest Rates

Peter Schiff - How to Save Yourself from "The Real Crash" Steaming Towards You

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Posted by Peter Schiff - Europacific Capital

on Monday, 26 March 2012 14:30

"The (Trade) data has proven my point. Just as the prosperity of the '90s and '00s blinded us to the coming crisis in '08, the current talk of recovery is distracting investors, commentators, and even academics from rapidly degrading fundamentals. This course can only lead to a greater crisis, that I have dubbed in my latest book "The Real Crash."

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This article was revised on March 23, 2012.

Earlier this month, the Department of Labor reported that 227,000 new jobs were added to the economy in February, marking the third consecutive month of positive jobs growth. Many observers have taken the news as evidence that the recovery is underway in earnest, helping send the S&P 500 index to the highest level in nearly five years. However, the very same day, the Commerce Department reported that after surging for much of the last year, the U.S. trade deficit increased to $52.6 billion for January - the largest monthly trade gap since October 2008. This second data point should dampen enthusiasm for the first.

From 2005 through mid-2008, those monthly figures almost always topped $50 or $60 billion, setting a monthly record of $67.3 billion in August 2006. But when the housing and credit markets imploded, attention was focused elsewhere. At that time, I was one of the few economists to raise a red flag about the dangers of growing trade deficits. In any event, the faltering economy took a huge bite out of imports, pushing the trade deficit down 45% in 2009. Even those people who were still paying attention to trade assumed that the problem was solving itself.

However, after reaching a monthly low of $35.7 billion in May of 2009, the trade deficit began to grow again, expanding 31% in 2010 and 12% in 2011.  While the $52.6 billion deficit in January is still about 10% below the monthly average seen in 2006-2008, if GDP continues to nominally expand, as many assume it will, we may soon find ourselves in the exact same place in terms of trade that we were before the financial crisis began. That's not a good place to be. 

If the jobs that we have created over the last few years had been productive, our trade deficit would now be shrinking, not growing. But the opposite is happening. These jobs are being created by the expenditure of borrowed money, and are not helping to forge a newer, more competitive economy. In the years before the real estate crash, our economy created millions of jobs in construction, mortgage finance, and real estate sales. But as soon as the bubble burst, those jobs disappeared. Today's jobs are similarly being built as a consequence of another bubble, this time in government debt. And, likewise, when this bubble bursts they too will vanish.

Throughout much of the last decade, I had continuously warned that the growing trade deficit was an unmistakable sign that the U.S. was on an unsustainable path. To me, monthly gaps of $60 billion simply meant that Americans were going deeper into debt (to the tune of $2,400 per year, per citizen) in order to buy products that we were no longer productive enough to make ourselves. I pointed out that America had become an economic juggernaut in the 19th and 20th centuries on the back of our enormous trade surpluses, which allowed for growing wealth, a stronger currency, and greater economic power abroad. This is exactly what China is doing today. Deficits reverse these benefits. (To learn how China is spending its surplus, see my latest newsletter.)

My critics almost universally dismissed these concerns, typically saying that our trade deficits resulted from our economic strength and that they were a natural consequence of our status at the top of the global food chain. I pointed out that even highly developed, technologically advanced economies still need to pay for their imports with exports of equal value. Instead, all that we have been exporting is debt and inflation.

The financial crisis initiated a painful, but needed, process whereby Americans spent less on imported products while manufacturing more products to send abroad. But the countless government fiscal and monetary stimuli stopped this healing process dead in its tracks. Government borrowing and spending redirected capital back into the unproductive portions of our economy. Health care, education, government, and retail have all expanded in the last few years. But manufacturing has not grown at the pace needed to solve the trade problem. In short, these jobs are creating more consumers and less producers, they are making us poorer rather than richer.         

Job creation at home has been like vegetation sprouting along the banks of rivers of stimulus. These artificial channels may help temporarily, but they prevent trees from taking root where they are needed most. Our economy has yet to restructure itself in a healthy manner. The recession should have forced us to address the problem of persistent and enormous trade deficits. We have utterly failed to do this. So while the job numbers look good for now, the pattern is ultimately unsustainable.  

The last time the monthly trade deficit was north of $50 billion, the official unemployment rate was under 6% and our labor force was considerably larger. Should this artificial recovery actually return millions of unemployed workers to service-sector employment, our monthly trade deficits could go much higher – perhaps eclipsing the previous records of 2006. It is possible that the annual deficits could top the $1 trillion mark, thereby joining the federal budget deficit in 13-digit territory.

Also, last week, we got news that our fourth quarter current account deficit widened 15% to just over $124 billion. The $500 billion of annual red ink is actually reduced by a $50 billion surplus in investment income (resulting primarily from foreign holdings of low-yielding US Treasuries and mortgage-backed securities – however, when interest rates eventually rise, this surplus will quickly turn into a huge deficit). At anything close to a historic average in employment and interest rates, today's structural imbalances could produce annual current account deficits well north of $1 trillion. As higher interest rates would also swell the federal budget deficit, it is worth asking ourselves how long the world will be willing to finance our multi-trillion dollar deficits?

Back in the late 1980s, when annual trade and budget deficits were but a small fraction of today's levels, the markets were rightly concerned about America's ability to sustain its twin deficits. This anxiety helped lead to the stock market crash of 1987. But with the boom of the '90s, all talk of trade deficits was dropped. Though I spoke out about the danger of having consumption chronically outstripping our productivity, the general feeling of prosperity meant my warnings fell on deaf ears – even as the deficit figures hit all-time record highs. This was a major factor in the economic implosion of 2008. However, even when the imbalance had reared its head, mainstream economics predicted that the economic contraction would slow consumption sufficiently to significantly close the gap. Once again, I took to the airwaves warning that if the government tried to solve the crisis by encouraging consumption instead of production, the trade gap would only get worse – causing a greater crisis in the near future.

The data has proven my point. Just as the prosperity of the '90s and '00s blinded us to the coming crisis in '08, the current talk of recovery is distracting investors, commentators, and even academics from rapidly degrading fundamentals. This course can only lead to a greater crisis, that I have dubbed in my latest book "The Real Crash."


To save 35% on Peter Schiff's new book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, pre-order your copy today

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription. 



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Bonds & Interest Rates

The "Spike" In Interest Rates: Are Treasuries FINALLY the Short of the Decade?

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Posted by Bond10yearedit TheArmoTrader & The Big Picture

on Thursday, 22 March 2012 10:17

There has been a lot of talk about the “spike” in bond yields over the past week. Some are declaring the end of the bull run in bonds and some are even calling for a complete spike in yields. Everyone is so sure that bond yields are now headed higher since “risk-on” is back as the Stock Market hits 3.5 year highs.

For years now, US government bonds have looked like terrible investments, what with those trillion-dollar deficits and multiple wars and all. But Treasuries just kept rising, earning their owners nice returns and making their critics seem like financial illiterates who didn’t know a AAAA credit when they saw one.

There has been a lot of talk about the “spike” in bond yields over the past week. Some are declaring the end of the bull run in bonds and some are even calling for a complete spike in yields. Everyone is so sure that bond yields are now headed higher since “risk-on” is back as the Stock Market hits 3.5 year highs.

But we all need some perspective. The “spike” that we saw last week was not inordinary.

Bond10yearedit

TheArmoTrader & The Big Picture



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Bonds & Interest Rates

These "Pick & Shovel" Investments Pay Reliable Double-Digit Dividend Yields

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Posted by Dividend Opportunities

on Wednesday, 21 March 2012 02:33

These stable businesses offer some of the most reliable dividends on the market today.

When gold was first discovered at Sutter's Mill in the foothills of California's Sierra Nevada mountains in 1848, thousands of people dropped everything and headed west with dreams of striking it rich. 

Within a year, San Francisco was transformed from a sleepy outpost with a few dozen shacks into a bustling mining hub. As gold fever spread, would-be prospectors poured in by the boatload from as far away as Chile and Hawaii. 

There was plenty of gold to be had in rivers and streams, particularly in the early days. But much of it went to larger operations that utilized high-volume hydraulic recovery techniques. The average miner sifting with a simple pan or other crude device was lucky to break even and recoup expenses. Thousands went home disillusioned and broke. 

However, while the great gold rush was a bust for many, the huge population influx was a boon for gaming houses, saloons and brothels. And several entrepreneurs made a fortune, among them a peddler of denim pants named Levi Strauss. 

In fact, the first millionaire to emerge from all of this was an enterprising retailer named Sam Brannan. Brannan famously cornered the market and bought nearly all of the available supplies of picks, shovels and pans. Then to drum up business, he ran through the streets showing everyone the newfound gold dust. 

Brannan was clever. He knew that some would find gold and others wouldn't -- but they would all need tools. And he was happy to supply them, at a substantial mark-up, of course. At the peak, Brannan was reportedly raking in $5,000 a day in sales, more than $140,000 in today's dollars.

What does any of this have to do with income investing? Plenty...

As the Chief Strategist behind StreetAuthority's Energy & Income advisory, I think the easiest way to explain this is using the energy field as an example.

From small independent explorers to integrated global giants, companies that find and produce oil and gas can make a ton of money for their shareholders. 

And many of these companies pay out steady dividends. For example, ExxonMobil (NYSE: XOM) has raised dividends nearly 6% annually for the past three decades.

But these companies are also exposed to fluctuating commodity markets. And as we all know, energy prices can be notoriously volatile. 

For example, Exxon shares are still well below their highs from before the recession on the heels of lower energy prices.

By contrast, companies that provide necessary equipment and services to these exploration companies aren't in the business of selling oil and gas. So they don't directly feel those day-to-day price swings. As long as prices are strong enough to support continued exploration and development activity, they stay happy.

It's the same situation that the "pick and shovel" companies during the Gold Rush were able to use to their advantage. 

In the income and energy field, there are a number of these types of companies... and many pay high yields.

Perhaps the best known group is master limited partnerships (MLPs). These aren't your traditional equipment and service companies that make pumps or drill bits... but they are every bit as important.

Without MLPs, the energy pumped out of the ground by energy companies would be useless. That's because these companies own the pipeline and storage assets -- so called "midstream" assets -- that help get energy from the field to the end user.

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MLPs typically aren't concerned with energy prices. They get paid for the volume shipped through their pipelines and storage terminals. They usually earn the same amount whether a barrel of oil is $150 or $50.

Of course, when you make money from simply transporting commodities (which are in constant demand) and don't have to worry about swings in their prices, you'd expect to see steady cash flow. This is the case with many MLPs, which pass along the bulk of that money to their investors in the form of steady yields. Most MLPs have yields averaging 5-6%, and it's not uncommon for some MLPs yield in the double-digits. 

But this same principal can be applied across the entire income universe. There are plenty of yields that come from companies doing the "exploring" -- whether it be actual exploration for energy, delivering the next breakthrough drug, or building a new airplane.

If you want to invest in the most stable businesses, however, look to the companies that will make money supplying the "picks, shovels and pans"... even if other companies don't strike gold.

[Note: For more about the income opportunities in the energy field, don't miss my recent presentation about energy royalty trusts. This field is small -- only about two dozen trade on the market. But we've found one trust yielding up to 17.1%. For more information -- including names and ticker symbols -- visit this link.]

Good investing!

Nathan Slaughter
Chief Investment Strategist, Energy & Income

Disclosure:  Neither Nathan Slaughter not StreetAuthority own shares of the securities mentioned. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any "real money" model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.




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Bonds & Interest Rates

Breakout in T-Bonds: 100 Years of History tells us if rising interest rates are bullish or bearish for gold

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Posted by Steve Saville - The Speculative Investor

on Monday, 19 March 2012 04:02

This week's downside breakout in the T-Bond futures market and the associated rise in the T-Bond yield has prompted us to re-visit the relationship between gold and interest rates. In the process of doing so we'll address the question: are rising interest rates bullish or bearish for gold?

We'll begin by noting what happened to nominal interest rates during the long-term gold bull markets of the past 100 years. Interest rates generally trended downward during the gold bull market of the 1930s, upward during the gold bull market of the 1960s and 1970s, and downward during the first 10 years of the current bull market. Therefore, history's message is that the trend in the nominal interest rate does NOT determine gold's long-term price trend.

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Bonds & Interest Rates

Stress Tests No Sweat - why the Fed is keeping interest rates so low

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Posted by Peter Schiff - Europacific Capital

on Friday, 16 March 2012 07:39

The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.

In the wake of the Credit Crunch, the Fed solved the problem of resetting adjustable-rate mortgages by essentially putting the entire country on an teaser rate. Just like those homeowners who really couldn't afford their houses, our balance sheet looks fineunless you factor in higher rates. The recent stress tests assume market interest rates stay low, the federal funds rate remains near-zero, and 10-year Treasuries keep below 2%. Why are those safe assumptions? Historic rates have averaged around 6%, a level that would cause every major US bank to fail!

The truth is that higher rates are the biggest threat to the banking system and the Fed knows it. These institutions remain leveraged to the hilt and dependent upon short-term financing to stay afloat. While American families have had to stop paying off one credit card by moving the balance to another one, this behavior continues on Wall Street.

In fact, this gets to the heart of why the Fed is keeping interest rates so low. Despite endorsing phony economic data that shows the US is in recovery, the Fed knows full well that the American economy cannot move forward without its low interest-rate crutches. Ben Bernanke is trying desperately to pretend that he can keep rates low forever, which is why that variable was deliberately left out of the stress tests.

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Unfortunately, rates are kept low with money-printing, and those funds are starting to bubble over into consumer prices. Bernanke acknowledged that the price of oil is rising, but said without justification the he expects the price to subside. This shows that Bernanke either doesn't know or doesn't care that the real culprit behind rising oil prices is inflation. McDonald's, meanwhile, is eliminating items from its increasingly unprofitable Dollar Menu. A dollar apparently can't even buy you a small order of fries anymore.

Unless the Fed expects us to live with steadily increasing prices for basic goods and services, it will eventually be forced to allow interest rates to rise. However, if it does so, it will quickly bankrupt the US Treasury, the banking system, and any Americans left with flexible-rate debt.

That is why the Fed feels it has no choice but to lie about inflation. If it admits inflation exists, then it may be pressured to stop it. However, if it stops the presses, it will bring on the real crash that I have been warning about for the past decade. Just as the Fed's response to the 2001 crisis led directly to the 2008 crisis, its response to 2008 is leading inevitably to either deep austerity or a currency crisis.   

[For more on the crisis ahead, pre-order Peter Schiff's latest book, The Real Crash, due out in May.]    

Imagine this scenario:

When the banks fail as a result of higher interest rates, the FDIC will also go bankrupt. Without access to credit, the US Treasury will not be able to bail out the insurance fund - which only contains $9.2 billion as of this writing. So, not only will shareholders and bondholders lose their money next time, but so too will depositors!

Americans are much less self-sufficient than they were in the Great Depression. One only needs to look at Greece to see how a service-based economy deals with this kind of economic collapse - crime, riots, vandalism, and strikes.

There are a few countermeasures left in the government's arsenal, including selling the nation's gold, but there comes a point at which the charade can go on no longer. The sharply widening current account deficit shows that we are becoming even more dependent on imports that we cannot afford. Just as homeowners had a good run pulling equity from their overvalued properties, Washington and Wall Street will soon find the music turned off. And there will be no one there to help them clean up the mess left behind.

I propose a new rule of thumb: until true economic growth resumes in the distant future, the fed funds rate should also be used as the "Federal Reserve credibility rate." We'll use a scale of 0-20, which is approximately how high rates went under Paul Volcker to restore confidence in the dollar. So, until the end of this crisis, if the fed funds rate is near-zero, all the Fed's statements, forecasts, and stress tests should be given near-zero credibility. When rates rise to 5%, the Fed's words can be assumed to be ¼ credible. When they hit 20%, that would be a Fed whose words you could take to the bank - if you can still find one.  


For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription. 

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.



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