national debt
Why Dr. Doom Is Bullish on Stocks
By George Leong for Investment Contrarians | May 2, 2013
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
Is the Only Safe Investment Your Piggy Bank?
By George Leong for Investment Contrarians | Apr 10, 2013
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
Why Japan’s Aggressive Money Tree Is Disastrous
By George Leong for Investment Contrarians | Apr 8, 2013
The world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!
And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.
Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.
I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.
Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.
The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise … Read More
If Cyprus Fails, So Will Your Investments
By George Leong for Investment Contrarians | Mar 26, 2013
There is a potential financial crisis brewing in Cyprus, and no one in the U.S. really seems to be that concerned. Just like our out-of-control national debt, sequestration, and growing number of unemployed and poor. Stocks continue to move higher, and it appears as though nothing can stop them.
There is clearly a financial crisis in the eurozone, which I feel traders in the U.S. have largely pushed aside during the American stock market rally.
In Cyprus, we all know the government tried to place a tax on all bank deposits in an attempt to raise $7.6 billion in capital as part of the country’s bailout deal. The strategy was turned down; so here we have the tiny island of Cyprus in the Mediterranean Sea where the estimated gross domestic product (GDP) of $22.45 billion in 2012 (source: International Monetary Fund) would be ranked dead last amongst the U.S. states, finishing behind Wyoming with just over $25.0 billion in GDP in 2011 (source: U.S. Department of Commerce).
So what’s the deal with Cyprus, and why should you be concerned?
While Cyprus is tiny and pretty well insignificant as far as its economic clout goes, a financial crisis, especially within the country’s fragile banking system, could drive widespread mistrust and confidence issues throughout the eurozone. This is the concern; that Cyprus could foreshadow a deeper financial crisis in the problematic regions of Italy, Spain, and Portugal.
Greece went through its financial crisis roller coaster, including two bailouts, and it is currently surviving on loans and credit. It’s going to take decades for Greece to recover from its financial crisis.
The fear … Read More
Fed’s Actions Making Retirement a Nightmare for Seniors
By George Leong for Investment Contrarians | Mar 25, 2013
On the surface, the Federal Reserve’s objective is to make sure America doesn’t fall into ruins. Following an aggressive strategy of monetary easing, the end result is interest rates at nearly zero percent and an endless flow of easy money. As I have already stated many times in these pages, the Federal Reserve has created an artificial economy.
Yet, if you think about it, the Federal Reserve’s push for low interest rates has helped the economic recovery—but it has also made life difficult for many Americans. The Federal Reserve’s low finance rates tend to make consumers buy more, enticed by the low carrying charges. This means more buying in homes, furniture, cars, clothes, or whatever goods and services that can be financed at cheap rates. But therein lies the problem. What happens when the Federal Reserve begins to raise interest rates? It’s going to get ugly.
There will be massive debt loads that will be subject to higher carrying charges and greater hardships for many consumers as wages for many continue to be flat.
And with the low interest rates due to the Federal Reserve, people are reluctant to save. Making less than one percent at the bank is not exactly an incentive to deposit money. In my last article, I discussed this issue of low savings. According to the Employee Benefit Research Institute (EBRI), a staggering 57% of workers surveyed said they had less than $25,000 in combined household savings and investments, excluding their homes. (Source: Greene, K. and Monga, V., “Workers Saving Too Little To Retire,” Wall Street Journal, March 19, 2013.) The problem is that the low … Read More
Dow Jones Hitting 15,000 a Real Possibility Thanks to the Fed?
By George Leong for Investment Contrarians | Mar 22, 2013
The Federal Reserve is intent on keeping this Fed-induced stock market rally intact for perhaps another few years.
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the … Read More
U.S. National Debt to Surpass GDP for Third Year in a Row
By George Leong for Investment Contrarians | Mar 18, 2013
The more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.
The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.
The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).
Translation: America is in a financial mess, and it will not be easy to get out of it.
And despite the national debt burden, the Federal Reserve has its hands tied. … Read More
Sequestration’s Here: What You Need to Know
By George Leong for Investment Contrarians | Mar 1, 2013
The day has arrived. Today will see the start of the much-anticipated $1.2-trillion decade-long budget cuts under the Sequestration Transparency Act of 2012 (394 pages if you want to read it), which represents America’s own austerity measures to cut the deficit. The proposed cuts will entail about $85.0 billion in annual budget cuts; and while it’s needed, given the runaway national debt of over $16.6 trillion, it will have a widespread impact on the state of the country and the economy, including program cuts, job losses, and chaos.
The cuts will have a negative impact on the country’s fragile economic recovery, but it’s something that is required; otherwise, it’s more of the same in the way of money printing and pumping up the national debt just to keep afloat and avoid a crash. If not for the significant fiscal and monetary policies that focused on pumping liquidity into the economy, I’m pretty sure the country would have fallen into a depression.
The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce gross domestic product (GDP) growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these difficult economic times, the sequestration is needed; without it, the ballooning national debt will continue to spiral out of control, hurting future generations.
While I doubt the budgetary cuts will drive the country into another recession, I do feel there will be negative impacts across the board.
The question is: where will some of the budget cuts be made?
Defense will lose a big chunk … Read More
How Debt Created an Artificial Economy
By George Leong for Investment Contrarians | Feb 25, 2013
The money printing presses appear to be in jeopardy. The amount of liquidity that has been pumped into the U.S. economy and other global financial systems has been superlative; and as I’ve said before, it would only be a matter of time before the massive national debt levels accumulated by the governments in the U.S. and Europe would wreak havoc with the economic recovery.
Yet, it may have finally clicked for the Federal Reserve, as comments made Wednesday questioned the central bank’s $85.0 billion in monthly bond purchases and suggested that the buying be reduced or stopped to avoid facing losses. Could you imagine losses for an already cash-strapped central bank, given the national debt?
What has been happening is the Fed’s bond-buying provided the mechanism to pump hundreds of billions of dollars of liquidity into the economy; it was meant to keep it going and avoid a worsening of the recession, but it added to the national debt. Not isolated to the U.S., other central banks around the world have been pumping cash into the fragile global economy. In the financially distressed eurozone, the European Central Bank (ECB) bought bad debt and provided easy monetary liquidity, in order to avoid a financial Armageddon. But this added to the national debt of the countries. Yet here we are: Greece is in shambles; Spain, Portugal, and Italy are broke; and the eurozone’s two powerhouses, Germany and France, are struggling with their own growth issues.
The problem is that the super loose monetary easing in the U.S. created an artificial economy that has been supported by the free-flow printing of money and … Read More
Wake-Up Call for America: China’s Currency Growing Worldwide
By Sasha Cekerevac for Investment Contrarians | Jan 31, 2013
While many people are aware that the Chinese economy is now the second-largest in the world, China’s currency, the yuan or renminbi, is also moving upward in the world rankings in terms of global transactions.
According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the world’s global payment system, the yuan has moved up from 20th in the rankings in January 2012 to 14th position in December 2012. The Chinese yuan is now above the Danish kroner in terms of global payments. (Source: “RMB Tracker: January 2013,” Society for Worldwide Interbank Financial Telecommunication web site, January 24, 2013.)
That is a significant move and an indication that the Chinese economy is becoming more integrated worldwide.
Why does this matter to the average American?
For a long time, America’s economy has been the global leader and the U.S. dollar has been the global reserve currency. Every other nation was seen as secondary to America’s dominance. This is now starting to shift.
As the U.S. national debt level continues to grow, the strength of the Chinese economy is enabling considerable efforts to be made at developing globally interconnected markets that can survive and thrive without the U.S. dollar.
While the Chinese economy is certainly not perfect, it doesn’t have to be. With the rising level of U.S. national debt, the Chinese economy just needs to be relatively better than the U.S. economy, though not in absolute terms.
The point is that the rise of the Chinese economy over the past decade and the looser restrictions that the Chinese government is placing on the yuan mean that global businesses and investors have … Read More
Why the Budgetary Talks Are Critical to America’s Future
By George Leong for Investment Contrarians | Jan 31, 2013
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
Open Fort Knox! The Ink at the Money Printing Press Is Dry
By George Leong for Investment Contrarians | Jan 17, 2013
The government needs money fast. The problem is that the bank vaults are closed for the time being, and unless they are opened by early March, America could face a cash crunch.
The intense battle between Congress and President Barack Obama, who is requesting an immediate increase to the current national debt limit of $16.4 trillion, is ongoing, but it needs to be resolved soon, as the current national debt subject to the limit is $16.39 trillion. Obama is threatening possible delays to Social Security and veterans’ benefits, along with an impact on the government payroll, if the cash doesn’t come. (Source: Lee, C.E., and Hook, J., “Obama Escalates Debt Fight,” Wall Street Journal,January 14, 2013.)
Failure to raise the national debt limit would mean the government accessing emergency funds to avoid a potential default.
The issue is that the Republicans in Congress want to see more budget cuts and cost control before they look at raising the national debt limit. Rating agency Fitch has warned that if the debt limit is not increased in a “timely” manner, America’s debt rating could be downgraded. In the article, Fitch said the use of the debt ceiling was “an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.” (Source: Ahmed, S., “Fitch Warns of US Downgrade Over Debt Fight,” CNBC, January 15, 2013.)
Moody’s Investors Service has already warned it may cut America’s triple-A debt rating … Read More
Fiscal Cliff Averted, but the Massive Debt Will Limit Government Flexibility
By George Leong for Investment Contrarians | Jan 8, 2013
Well, the doom and gloom of the fiscal cliff was averted in the nick of time, which in turn, pleased Wall Street and gave stocks a boost to begin the new year.
While the deal was a nice compromise between the two parties on the tax issues, there is a lot of work ahead for President Obama, as the statutory national debt limit of $16.4 trillion nears. As of this morning, the national debt balance used for the limit stood at a superlative $16.39 trillion. The headline national debt of $16.43 trillion is actually already above the limit, but don’t worry, the Treasury Department said it will be able to pay its debt payments and bills. Of course, we know this will also hold until the extended deadline on March 1.
The bottom line is: President Obama needs money to operate his plan to save America. Obama has asked for increased power to increase the national debt limit without Congress, but we all know this will never happen under the Republican-controlled House.
So while I view fiscal and monetary strategies as critical to keeping economic growth going, I also understand that the government needs to be tough and do something to the staggering national debt or risk deepening the financial crisis down the road for generations.
The problem is that if too much spending is cut, the impact on the economic recovery could be enough to send America back into another recession and financial crisis this year.
The question is concerning where some of the budget cuts will originate from.
Defense will likely lose a big chunk of its budget, … Read More
Fiscal “Y2Cliff” Sham Held Investors Hostage in 2012
By John Whitefoot for Investment Contrarians | Jan 4, 2013
On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.
Some things never change.
As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.
On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.
None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.
While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.
For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.
But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. … Read More
Stock Market and Economy: What We Can Expect in 2013
By George Leong for Investment Contrarians | Jan 3, 2013
Happy New Year to all of our Investment Contrarians readers!
In 2012, small-cap stocks were the second-best performing group, following the technology sector. The Russell 2000 was the top performer in December and has been since the end of the first quarter. How the small-caps fare this year will, again, depend on the global economy.
My stock analysis tells me that what happens in January will be an important indicator for the year as far as performance. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to the Stock Trader’s Almanac. In 2012, January was a strong month, so it was not a surprise to see the relatively good advance in stocks.
As we move into 2013, the focus will be on any remaining fiscal cliff fallout and the impact of the deal, along with the eurozone mess, the U.S. national debt, and jobs growth.
For 2013, my stock analysis is cautious to start the year, based on the high global risk.
The fact that the economy is triggering some jobs growth is encouraging. My analysis is that this will likely continue in 2013, although the unemployment rate is expected to remain relatively high at over seven percent.
My stock analysis shows that we need to see leadership from such areas as the financial and technology sectors. The big banks were strong in 2012, but we also need to see technology take a leadership role.
It definitely will be a tricky year, given the global and domestic issues, along with suspect earnings and revenue growth to start the first quarter.
Again, as I … Read More
Why the GDP Reading Should Be Ignored
By George Leong for Investment Contrarians | Dec 21, 2012
If you believe the recent gross domestic product (GDP) reading, you would think the country is doing well, on its way to better times ahead—but hold on.
The third estimate of U.S. GDP growth showed a stellar 3.1% annualized rate, according to the Department of Commerce, well above the 2.7% Briefing.com estimate. But before you get too excited, know that the reading was aided by government spending, which increased 3.9% in the third quarter and contributed 75 basis points to the GDP reading. (Source: “Exports, government spending buoy third-quarter growth,” Reuters, December 20, 2012.)
While the government-aided GDP is positive, my concern is that the fiscal spending will likely begin to slow, given the pending “fiscal cliff” on January 1. And yes, it will happen; albeit, I’m not sure what the actual impact will be as the two parties continue to debate the mechanics.
One thing is for sure: America doesn’t have a lot of capital to freely spend. But then it has always been able to go to the printing presses to issue more money into the system and add to the out-of-control national debt.
Just take a look at the Federal Reserve. The printing of money in America will continue and intensify after the announcement of a more aggressive stimulus strategy that will involve the additional monthly buying of $45.0 billion in longer-term Treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds from the third round of quantitative easing (QE3) in September. (Source: Federal Reserve press release, December 12, 2012.) My concern is that the additional buying of bonds will add another trillion dollars … Read More
What a Great Strategy: Need Money? Print More Money
By George Leong for Investment Contrarians | Dec 14, 2012
Federal Reserve Chairman Ben Bernanke has spoken, and to no one’s surprise, the printing of money in America will continue and intensify under the soon-to-be newly launched “Quantitative Easing 4” program, or “QE4.” So now we have had several Federal Reserve programs to keep the flow of money going, and now it looks like there will be more money printing.
Under this aggressive money printing strategy, the Federal Reserve will pursue a more aggressive stimulus strategy in September that will involve the additional monthly buying of $45.0 billion in longer-term treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds under QE3. (Source: Press release, Federal Reserve, December 12, 2012.) The concern is that the additional buying of bonds will add another trillion dollars to the Federal Reserve’s balance sheet in 2013, driving the amount up to $4.0 trillion and keeping the money-printing machine going.
While the aggressive move by the Federal Reserve is needed to make sure the U.S. economic recovery doesn’t falter, many are concerned that the easy money will drive inflation higher. Of course, this has yet to happen, as consumers appear more worried about paying down debt levels than spending. The Federal Reserve suggests it would keep interest rates near zero as long as the unemployment rate hovers above 6.5% and inflation remains manageable.
The market view on the Federal Reserve appears to be unfavorable, based on the initial reaction following the announcement of QE4. Based on the Federal Reserve’s assessment, there’s concern that the U.S. jobs picture and economy may be worse than we expect. “Although the unemployment rate has declined somewhat … Read More
Why Printing Money Is So Easy for the Fed
By George Leong for Investment Contrarians | Dec 12, 2012
The Federal Reserve is busy looking at what to do next to try to keep the economic renewal on track, as the central bank meets for the last time this year. The Fed also understands its impact will be hindered by the ongoing battle in Congress regarding the pending fiscal cliff.
The Federal Reserve is speculated to continue its third quantitative easing (QE3) program of buying mortgage bonds each month. The effect will see the Fed increase its holdings of mortgage bonds to nearly $4.0 trillion, according to a Bloomberg survey. (Source: “Fed Seen Pumping Up Assets to $4 Trillion in New Buying,” Yahoo! Finance via Bloomberg, December 11, 2012.)
The bond buying has helped to ease financing rates and drive the housing market higher.
The Fed has spent $40.0 billion a month to buy mortgage-backed securities and, in theory, lower the financing rates. The yield on the 10-year Treasury stands at 1.6% versus 1.8% prior to the establishment of QE3—so it’s working.
For the Fed, as the QE3 works its way through the system, job creation is expected to be a major benefactor.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed, despite the unemployment rate falling to 7.7% in November. There are still over 21 million Americans looking for work.
To date, the super-low interest rates at between zero and a quarter of a percent have helped to prevent the country from falling into the abyss. If not for the low rates, the carrying cost of the $16.0 trillion in national debt would be suffocating and making the situation worse, … Read More
Time’s Running Out; Fiscal Cliff Needs a Resolution
By George Leong for Investment Contrarians | Dec 6, 2012
America is fast approaching the $16.4-trillion limit in national debt that is legally allowed under the current debt ceiling. With the current debt at $16.24 trillion, time is running out, which is why we need to either resolve the fiscal cliff or, as the President wants, hike up the national debt ceiling in order to allow the government more flexibility in its spending. Failure to raise the national debt limit would mean that the government would need to access emergency funds to avoid a default and initiate the fiscal cliff cuts and tax increases in some form.
So far, the talks between House Speaker John Boehner and President Obama have resolved little. Just last week, Boehner offered up a new 10-year, $2.2-trillion strategy that entailed adjustments to Medicare and Social Security benefits but also avoided a return to higher taxes for the nation’s top income earners. In response, the President is willing to look at reviewing the highest tax rate for the rich, but at the same time, he wants to cut loopholes.
With just over three weeks left in the year, something will need to be done. In the event that a resolution is not achieved, the government will have to access emergency funds until a deal is agreed upon. This is the dilemma that we are at now; but something has to be done, or America could be leaving a much worse financial mess for the generations ahead, including a possible recession and massive national debt.
Moody’s Investors Service warned it may cut the U.S. triple-A debt rating for a second time in 2013, should the government not … Read More
Why Gold Will Be the Super Commodity
By George Leong for Investment Contrarians | Dec 5, 2012
I’m tired of reading and talking about the so-called “fiscal cliff,” but it could spell dire consequences for the economy if it is allowed to go through (and even if not). The reality is that America needs to stop printing money with no regard for the massive national debt load. Allowing the debt to continue to rise will punish the country’s future generations.
If we assume that the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding gold and whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
For any gold investor, the question is whether to buy the physical bullion or gold mining stocks. For the average investor, I favor gold stocks over the higher risk of other options.
The mining sector continues to be an excellent place to make money. An investment strategy would be to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.
For exchange-traded fund (ETF) investors, the SPDR Gold Trust ETF (GLD) is worth a look and is currently trading in a sideways channel above the 50- and 200-day moving averages (MAs).
Chart courtesy of www.StockCharts.com
If you are looking at … Read More
32 Days: Countdown to the Fiscal Cliff
By George Leong for Investment Contrarians | Nov 30, 2012
There were two winners of the Powerball lottery jackpot of $588 million Wednesday night. I was wondering if there was any chance they could help out with paying down some of the country’s burgeoning $16.2 trillion in national debt, its out-of-control deficit, and its runaway spending. Hey, isn’t that what the fiscal cliff is all about?
With 32 days remaining in the year to resolve this financial crisis, President Barack Obama and Republican House Speaker John Boehner are hard at it, trying to come to a compromise.
The reality is that, like many of you, I’m growing weary of hearing the “FC” term: financial crisis. Let’s just deal with the financial crisis stalemate and work out a deal that makes both parties happy, and slows down the frivolous printing of money that has allowed America to spend endlessly and create the financial crisis that is now lurking.
When I think about it, the government is operating a Ponzi scheme. They’re printing money and using it to pay for the undisciplined spending; when the money runs out and payments are due, they go out and print more money to cover them, and so on. This Ponzi scheme must be halted.
Just take a look at the market action. We are seeing a ridiculous number of U.S. companies declaring “special dividends” to try to help investors avoid higher dividend taxes in 2013 if the fiscal cliff is allowed to move forward.
From the end of September to mid-November, Bloomberg reports that 59 companies belonging to the Russell 3000 Index announced special cash dividends, versus 15 companies in the same timeframe in 2011. … Read More
Why the Fiscal Cliff Is Only One Problem Amongst Many
By George Leong for Investment Contrarians | Nov 14, 2012
There are 47 days left in the year, and I’m worried. Not about my holiday shopping, albeit the retailers might be, but about whether President Obama can get Congress to agree to his demand to extend the Bush-era tax cuts, while increasing taxes to the rich, cutting expenses, and avoiding a potential financial crisis.
Based on what has happened since the election on November 6, we are seeing a selling bias toward stocks, as there may be a shift to investors taking their profits now; investors are avoiding what will likely be higher taxes on capital gains and investments going forward in 2013 should the fiscal cliff be allowed to follow through without any modification.
We are at a standstill. A financial crisis may be at stake.
The Republican-controlled House wants the tax cuts extended to all taxpayers, while Obama said he would veto any bill that pushes for tax cuts to those earning over $250,000 annually. You can see the dilemma and the difficulty concerning the cliff and potential financial crisis.
Of course, the government needs to be tough and do something to the staggering $16.3 trillion in national debt, or risk deepening the financial crisis.
With every passing second, America is growing poorer, and it will continue to unless major changes are made to avert a financial crisis. At the core of the problem is the direction of the upcoming fiscal cliff and its impact on the economy, national debt, and the financial crisis.
If too much spending is cut, the impact on the fragile economic recovery could be enough to send America back into another recession and … Read More
Enough Is Enough; Spain Needs a Bailout
By George Leong for Investment Contrarians | Nov 13, 2012
It would appear that Spain is still somewhat delusional regarding its ability to avoid having to ask the European Central Bank (ECB) and International Monetary Fund (IMF) for emergency capital. I previously discussed this issue after Spain’s finance minister, Luis de Guindos, said, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” CNBC, October 5, 2012, last accessed November 12, 2012.) Yet, the country is still being unrealistic in its view and is now facing a financial crisis that will likely worsen.
Maybe Spain doesn’t realize that when one of every four of your citizens has no job to go to, there’s a problem. The ECB’s buying of troubled and overpriced Spanish bonds in an effort to reduce the financing charges represents a bandage solution to a financial crisis. Spain talks about the lower yields. Yes the 10-year yields on Spain’s bonds are no longer over 10.0%, but at the current 5.9%, these yields are still comparatively high and not sustainable. Now, if Spain can get its yield down below three percent, then maybe the bond-buying will help; but until that happens, I’m not convinced, and Spain will continue to walk on a tightrope and see its financial crisis deepen.
Spain doesn’t want money, as it knows that emergency funds also come with strings attached: being told what to do with its budget, spending, and austerity measures.
Yet something must be done or Spain’s financial crisis will worsen. The problem is that Spain, like the United States, is facing muted growth, and a tough austerity program would bind Spain’s spending and would impact its … Read More
What’s Around the Corner Now the U.S. Election’s Over
By George Leong for Investment Contrarians | Nov 8, 2012
Investors bid up stocks prior to the presidential election on Tuesday, when President Barack Obama won his second term. Investor confidence was due to some uncertainty eliminated with the election, but the nervousness quickly resurfaced on Wednesday morning, impacting investor confidence; stocks plummeted on the realization that Obama still has many hurdles to overcome and the fact that the global economy, namely in Europe and China, may be prone to more weakness that will negatively impact investor confidence.
I’m sure President Obama is relieved that the election is over; but I can tell you, it’s only the beginning of some difficult times ahead that will challenge his patience and fortitude, while also impacting investor confidence.
While the uncertainty of the election is over, there is a lot of work ahead for Obama, as he now needs to immediately deal with the pending fiscal cliff. This will not be an easy feat, but it must be done to instill some investor confidence in the equities market.
The major problem is that President Obama must be careful, as he will need to cut and control the deficit and national debt of over $16.0 trillion, while at the same time not allowing the full extent of the $607.0 billion in broad budget cuts to take place on January 1; if he doesn’t balance the two, he will likely kill the economic recovery, 2013 and 2014 gross domestic product (GDP) growth, and investor confidence.
Moreover, any agreements or decisions made by President Obama will need to be agreed upon by the House. This will be problematic, given the continued political gridlock, as the Republicans … Read More
Dear Mr. President: Now It’s Time to Deliver on Your Promises
By George Leong for Investment Contrarians | Nov 7, 2012
By the time you are reading this, either Barack Obama or Mitt Romney will have won the race to be the 45th President of the United States.
Yet I will remind the winner that there’s not much time to rejoice in the victory, as there’s plenty of work ahead, which will dictate the direction of America over the next four years in relation to debt, job creation, economic growth, and foreign policy.
Whoever has won, they need to work on job creation at a much stronger rate than the current pace. All those promises that were made during the election campaign must now be acted upon. We need to create strong job creation and sustained jobs growth, while lowering the unemployment rate. The Federal Reserve is cautious about job creation into 2013. Obama and Romney have different strategies for lowering the unemployment rate and increasing job creation. But the reality is that unless Americans are put back to work, the economic recovery will likely stall and add to a possible financial crisis.
The most immediate concern for the next president will be what to do about the pending fiscal cliff on January 1, 2013, which calls for $607.0 billion in automatic budget cuts to avert a financial crisis. The Congressional Budget Office (CBO) recently warned that the U.S. economy could contract in 2013 if the spending cuts are allowed, which would impact job creation. (Source: Congressional Budget Office, last accessed November 6, 2012.) I expect the same.
At a round table meeting of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), there was talk of the U.S. … Read More
Why the Next U.S. President Is Facing a Mess
By George Leong for Investment Contrarians | Nov 5, 2012
The election is finally here. We are all excited to see who will be the 45th President of the United States.
President Obama wants to stay at the White House, while challenger Mitt Romney wants to evict him. Whoever is the winner, there will be a slew of challenges for him to deal with. It may not be as bad as four years ago when the newly minted President Obama faced a massive subprime financial crisis, government bailouts of the big banks and auto sector, and a great recession, but there are still major obstacles to deal with.
If Obama holds on, you can expect a push to remedy the healthcare system and make it more efficient and cost-effective under the program coined “Obamacare.” Healthcare cost control is important as a means to control the mounting national debt and avoid a financial crisis. Over $752.0 billion is spent annually on Medicare/Medicaid, which is the second-biggest area of spending for the government following Social Security. (Source: U.S. Debt Clock, last accessed November 2, 2012.) Failure to rein in costs could create a financial crisis.
The $16.0-trillion national debt could grow to a whopping $22.7 trillion by the end of the next President’s term in 2016 if nothing is done, based on the current pace. (Source: U.S. Debt Clock, last accessed November 2, 2012.) This could lead to a financial crisis. By 2016, annual spending on Medicare/Medicaid could reach over $940.0 trillion if costs continue to rise and drive a financial crisis in health care. Social security in 2016 could surpass $1.1 trillion annually, and this is not sustainable. Those who are … Read More
Mr. Bernanke: When Is QE3 Going to Work?
By George Leong for Investment Contrarians | Oct 25, 2012
Three strikes and you’re out! Too bad the Federal Reserve doesn’t follow this; otherwise, Chairman Ben Bernanke would be on the phone with Wall Street looking for another job.
The key stock indices surged to their highest levels in years after the Federal Reserve launched a third round of quantitative easing (QE3) at the September meeting; yet the follow-through has been non-existent, as stocks are back where they were prior to the announcement.
All quotations and figures in this article are from a Federal Reserve press release regarding the Federal Open Market Committee meeting in September 2012, dated September 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm).
At that meeting, the Fed said, “Information received since the Federal Open Market Committee (FOMC) met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated.”
The Fed is spending $40.0 billion a month to buy mortgage-backed securities and, in theory, to lower the financing rates. This is the theory, but the yield on the 10-year Treasury stands at 1.76% versus 1.84% prior to the establishment of QE3. Something isn’t working.
But maybe it’s still too early to judge the success of QE3. Give it a few months to filter through the system and we’ll see. Jobs creation is expected to be a major benefactor of QE3.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed despite the unemployment rate falling to 7.8% in September. We still have over 22 million Americans looking for work.
“The Committee seeks to foster maximum … Read More
Folks! We Have $16.0 Trillion in Debt
By George Leong for Investment Contrarians | Oct 17, 2012
When you scroll through the pages of Investment Contrarians, you cannot help but notice the running U.S. national debt counter that sits at over $16.2 trillion and rapidly moves higher. With every passing second, America is growing poorer and will continue to unless major changes are made, but it will be difficult. At the core of the problem is the direction of the upcoming “fiscal cliff” and its impact on the economy and national debt.
Automatic and massive budget cuts are forthcoming in January, unless an extension is made. At first, this may sound like the correct strategy but, as many of you know, cutting government spending will impact the country’s already fragile economic recovery. And what concerns me more is where the cuts will be made.
The problem is that a significant cut in fiscal spending could make the economy worse, according to the Congressional Budget Office (CBO). The CBO predicts the U.S. economy could contract by 0.5% in 2013 if the spending is curtailed. (Source: www.CBO.gov.)
While there is no indication of what areas will be affected, my feeling is that the cuts will likely be from Medicare/Medicaid, Social Security, defense/wars, and federal pensions.
Whether President Obama extends his term in office or Mitt Romney takes over, the next government has major decisions to make, including what to do with the pending budget cuts.
The media continues to focus on the debt distress in Spain and the tough road ahead for Greece, but there is seldom any mention regarding the massive and runaway U.S. debt.
Spain has a national debt of around 758 billion euros, about US$988 billion, … Read More
Warning: How the Market’s Lying to You
By George Leong for Investment Contrarians | Sep 19, 2012
Small-caps were stellar in the first two weeks of September, with the Russell 2000 advancing an impressive—yet perhaps overzealous—6.4%. The broader market, along with blue chips and technology issues, has also shown great strides. For the year, technology and small-cap stocks are leading the pack, with the NASDAQ and Russell 2000 up 22.2% and 16.6%, respectively. These are the biggest gains in years, but I question their validity.
The S&P 500 is at multi-year highs, but every time I look at the long-term technical chart of the index, I’m concerned. Since 2000, there have been two major tops at above 1,400, and the current bull market rally from March 2009 appears to be heading for a third top.
The Federal Reserve-driven rally has been behind the buying, along with some perceived calm in the eurozone, with the recently announced bond-buying program by the European Central Bank (ECB). I continue to see risk in the U.S., eurozone, and China. In China, in particular, we are seeing a decline in consumer spending, which is worrisome because it’s the Chinese government’s prime focus. China is spending on additional stimulus, but the consumer needs to get involved.
Global delivery bellwether stock FedEx Corporation (NYSE/FDX) issued a deep cut in its guidance for fiscal 2013 due to the deterioration of the global economy. This was the second time FedEx cut its guidance, and with the company being a barometer on the global business environment, the news is a concern, raising a red flag as a signal to those who believe all is good.
In my view, I’m not getting dragged in by the rally. I … Read More
America: The Land of Debt
By George Leong for Investment Contrarians | Aug 24, 2012
Traders and the media are focused on the debt distress in Spain, as the country is hindered by a national debt of around 712 billion euros, or about US$892 billion, which breaks down to US$19,391 per citizen. This is why Spain is seriously concerned about the 10-year bond yield at close to seven percent. Paying these high financing costs, trying to cut its national debt and manage its budget will not be easy. The reality is that the eurozone and Europe are in a serious financial crisis.
But while the Spanish situation and the economies of Italy, Greece, Portugal, and Ireland look bad, somehow everyone seems to be ignoring the $15.9 trillion of national debt in the U.S. That’s $50,863 per citizen, or more than double that of Spain. Worst of all, the national debt is mounting at an alarming rate, and it’s not going away anytime soon. The only plus here is the country’s low bond yields. If the U.S. had to pay out the high yields Spain does, the U.S. would be broke and facing a credit crisis.
This national debt will take decades to pay off or even get it to more manageable levels.
Something drastic needs to be done regarding the national debt or the country’s financial strength will go down the toilet!
Never mind talking about the European debt issues; just look in our own backyard where there’s plenty of work to be done.
Whether it’s President Obama or Republican hopeful Mitt Romney, I don’t care; but the next President will need to focus on deficit cuts and reducing or corralling the national debt, along … Read More
Spanish Economy in Dire Straits
By George Leong for Investment Contrarians | Aug 7, 2012
Markets were disappointed following the decision of both the Federal Reserve and European Central Bank (ECB) to inject monetary stimulus into their respective economies. And like the Fed, the ECB will look to the bond market for help as it considers another bond-buying program for Spain in hopes of driving down yields with the country facing a financial crisis.
Yet the problem is that Spain needs help now, as the 10-year Spanish bond traded at an unsustainable yield of 7.2% on Friday, which could force the country to seek a bailout to avoid a worsening of the financial crisis. Spain says it doesn’t need a bailout but a loan.
ECB chief Mario Draghi said the central bank would help Spain once it formally requests a bailout. Spain has already received about $130 billion to avert a financial crisis in its fragile banking system. My view is the ECB wants to see Spain put together a tough austerity program in exchange for a bailout, but Spain is trying to avoid this.
A tough austerity program would bind Spain’s spending (but isn’t this needed?). The country is declining in its economic strength. Its economy has fallen to 12th in the world in 2011, according to the International Monetary Fund (IMF). Previously, Spain’s economy was the ninth largest, but with its financial crisis it has since been surpassed by Russia, Canada, and India. Regardless, a collapse in Spain would be devastating.
The thought of tough austerity measures in Spain is causing civil unrest. Just like Greece, the country is facing a financial crisis, a second recession, and an unemployment rate of 25%. The … Read More
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