Debt
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With Unchecked U.S. Spending, It's Time to Hedge Against Inflation
Uncontrolled government spending could force the Fed to monetize the government's debt, creating runaway inflation, former Federal Reserve Governor Frederic Mishkin warned in a report.
If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.
In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.
The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."
The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.
This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.
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Fiscal Cliff 2013 Will Bury Debt-Ridden U.S. Cities
With fiscal cliff 2013 approaching on January 2, it is struggling U.S. cities that stand to suffer the most if Congress fails to help.
These U.S. municipalities are already in terrible fiscal shape due to the effects of The Great Recession. Now they're facing the effects of automatic tax increases and deep spending cuts of 9%, about $560 billion in total.
Like Gramm-Rudman-Hollings from 1985 that imposed automatic spending cuts, these powerful one-two combinations will floor cities that have unwisely come to rely on federal aid.
"Cities are going to be facing very rough waters for the next couple of years," predicted Michael Pagano, dean of the College and Urban Planning and Public Affairs at the University of Illinois-Chicago.
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Five "Extra" Moves to Make Right Now to Protect Your Financial Future
I hear from countless investors around the world every week. Many of them want to know what "else" they can do to protect their financial future, especially now that the markets could get ugly (again).
Here are a few quick thoughts:
1) Chart your course
A surprising number of investors tell me that things were going along just fine then - boom - one day they woke up and everything had turned into a disaster.
If only it were that simple. The truth is digging a hole takes time and a whole lot of effort. If you're in trouble now it's because you haven't been paying attention for a while.
Knowing what to do is only 10% of the game. The other 90% comes from having a plan.
I don't care if it's nothing more than on the back of an envelope or a Post-it like the ones that cover my desk. It's vitally important you have one.
Unfortunately, "Beating the S&P 500" doesn't qualify as a plan. Neither does "retiring in style." You have to plan for real-life goals.
For some people, this may be paying for a grandchild's education. For others it might mean building up $20,000 over five years to take that once-in-a lifetime trip, accumulating $300,000 to build a vacation home, or ensuring that you have $2,000-$10,000 a month to live on 20 years from now.
You have to be specific. That way you learn to control your money before it controls you. If you need help, find a competent financial advisor immediately and ask the right questions.
If you realize you can meet your goals by hitting singles, it makes no sense to constantly swing for the fences and risk striking out. Lower your risk and concentrate on the return of your money rather than the return on your money.
Not only will you sleep better, but chances are your returns will be more consistent for having done so.
2) Refinance your home (and everything else, too)
Interest rates have fallen for more than 30 years to near zero. They are unlikely to fall much further. If anything they are likely to rise. Nobody knows exactly when or how high they will rise, but that's not the point.
What's important to realize (and that many people have forgotten) is that the median 30-year mortgage rate is nearly 9%, or roughly 150% higher than the best rates available today. Even a minor uptick means you will lose huge amounts of purchasing power.
Obviously you have to pay closing costs every time you refinance, but the fees can be worth it if you plan to be in your house long enough to break even.
Here's how to run the numbers.
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JPM Losses Get Worse and Worse
JP Morgan Chase (NYSE: JPM) cannot escape its enormous loss on a credit derivatives bet gone bad.
The London Whale trade, as it is informally known, was originally reported as a $2 billion loss. But now The New York Times has reported the loss will total $9 billion -- and maybe more.
But Money Morning subscribers were well aware of the possibility JP Morgan's losses would exceed $4 billion or $5 billion. Money Morning Capital Wave Strategist Shah Gilani repeatedly said this "hedge" was really a bet, and was among the first to predict how large the losses would eventually turn out to be.
Gilani, who hosts the radio show "On the Money!" in addition to his Money Morning duties, had this to say about JP Morgan's ill-conceived bet:
"What it does is shine the light on what is actually happening. It's not the loss in terms of the money, it's the loss in terms of faith for [CEO] Jamie Dimon, that he has been pushing hard against the regulators... in particular to the Volcker Rule, saying there is no need for it and it and that banks have a good handle on their risk... and that we (JP Morgan) don't have a problem with it because we are just hedging."
Just hedging? Gilani certainly doesn't think so.
Gilani said that statement is a flat-out lie and that Dimon has basically lied to Congress in his testimonies over the past weeks.
In the testimony before the House Financial Services Committee last week, Dimon said the London unit had "embarked on a complex strategy" that exposed the bank to greater risk even though it had intended to minimize risk.
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Fiscal Cliff 2013: How Investors Can Prepare
Late science fiction writer Ray Bradbury wasn't referring to investors when he said, "you've got to jump off cliffs all the time and build your wings on the way down," but he might as well have been referring to the upcoming fiscal cliff in 2013.
The fiscal cliff is a real crisis looming at year's end. The fragile U.S. economy could face an unparalleled fiscal punch of as much as $720 billion if the scheduled changes go through as planned. They include the Bush-era tax cuts set to expire Dec. 31 and billions of dollars in programmed federal spending cuts.
U.S. Federal Reserve Chairman Ben Bernanke has warned that shocks from such changes will most likely cause the economy to contract, causing a recession.
And without cooperation from Congress, there's no alternate route for the U.S. economy to take.
Ernie Gross, Ph.D., MacAllister Chair and professor of economics at Creighton University, told Forbes, "The fiscal cliff is an almost 100% certainty."
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The Eurozone Bailout: Prepare for What's Next
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Two Stocks to Buy in Uncertain Times
Europe’s debt problems are hitting a breaking point, U.S. economic growth is slowing and the Dow is down about 7% in the past month – so investors want to know what to do. Money Morning Capital Waves Strategist Shah Gilani is doing just that – sharing the stocks he thinks will provide safety in these uncertain times. He joined Fox Business’ “Varney & Co.” Tuesday morning to share with host Stuart Varney two investments he has recommended to his Capital Wave Forecast subscribers. One is a solid pharmaceutical company with blockbuster drugs barreling down the pipeline and 4.8% dividend yield. The other is an alternative utility-based investment with 5.8% dividend yield. Watch this clip to learn more.
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No Bull: Could the 10-Year Note Hit 1%?
In the wake of Friday's disastrous jobs number, 10-year Treasury Note yields finally fell through the 1.5% level, trading as low 1.44% on the day.
That plunge took many traders, talking heads and politicians by surprise.
Our "leaders" in Washington D.C. were heard to say: "Nobody saw this coming."
Well, that's just not true. Not one iota.
If you've been reading Money Morning you saw this coming. So did tens of thousands of our Money Map Report subscribers.
I've been warning that 10 year yields would drop below 2% then hit 1.5% for more than 2 years now.
In fact, our readers had the opportunity to profit handsomely on our bond related recommendations that have earned them 30%-71% so far.
What does this mean for you?
First questions first...
Now that we've busted 1.5%, the next stop is 1%.
I can even see negative yields ahead, meaning that investors who buy Treasuries will actually be paying the government to keep their money.
Be prepared. I'm going to show you here what to do and - yes -how you can profit from this move-- even at this stage of the global financial crisis.
Why Bond Yields Will Continue to Fall
First off, 10-year yields dropping to 1% means several things:
- Bond prices go even higher. Rates and prices go in opposite directions. Therefore when you hear that yields are falling, this means that bonds are in rally mode.
- The world is more concerned with the return of its money than the return on its money. You can take your pick why. Personally I think it comes down to two things above all else: the looming disintegration of the Eurozone and the fact that our country is $212 trillion in the hole and warming up for another infantile debt ceiling debate instead of reining in spending.
- More stimulus. Probably in the form of a perverse worldwide effort coordinated by central bankers as part of the greatest Ponzi scheme in recorded history.
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Five Ways to Make 2012 Your Best Year Ever
I hear it everywhere I go. I'll start investing again...
...when the debt problem is fixed.
...when the markets pull back a little.
...when the EU crisis is over.
...when the elections are over.
Chances are you've said some of these same things to yourself.
Yet, waiting is exactly the wrong thing to do. Time is something you never get back.
And when it comes to consistent investment returns, time is the one thing you always have to capitalize on - without fail.
Besides, waiting makes it harder to get back in the game. Ask anybody who missed the S&P 500's 99.53% run up off March 2009 lows that carried things until April 2011.
Or the 87.26% run up through July 2007 following the low set in 2003. Or the 569.25% move from November 1987 (shortly after Black Monday) through January 2000.
No. The way I see it, the thing to do is to begin investing the moment you decide you want to. That way you pique your imagination, your motivation and your returns.
Five Ways to Get Better Results in 2012
Here are five tips to help you get started:
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