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These Two Market Crash Signals Are Lighting Up

By , Global Credit Strategist, Money Morning • @MichaelELewitt -

yahoo earnings

After last week’s strong finish, it’s no shock that Wall Street’s starting to make encouraging noises about “recovery.” But when did those folks ever tell you the truth?

There are two signals that never lie. They always light up before the market crashes.

And right now, those two signals are flashing red. Here’s what they are, plus what they mean for you.

The Real Reason Russia and China Are Dumping U.S. Debt

By , Money Morning -

U.S. debt

The dollar is a weapon, built up by the U.S. debt to foreign nations and protected by U.S. military might.

But the U.S.'s financial foes aren't taking it anymore. They want to bring an end to this financial weaponization of the dollar.

And in doing so, they are going to do whatever it takes to both diminish the dollar's role as a reserve currency and introduce a new international payments system to settle global transactions...

AIG Stock Sale Doesn't Justify Bailout Package

By , Money Morning -

The U.S. government, for the first time since 2008, is officially a minority stakeholder in American International Group Inc. (NYSE: AIG), with an $18 billion stock sale that made money for taxpayers.

The AIG stock sale will reduce the government's stake in the insurance company to about 22% from 53%.

The U.S. Treasury Department announced Sunday it was selling a large chunk of shares in the bailed-out insurer. The government saved AIG in 2008 and 2009 with a bailout package that totaled around $182 billion.

Including Monday's sale and money from AIG, the Treasury claims it has recovered a total of $197.4 billion from AIG - a $15 billion profit for taxpayers.

It's not surprising the government is selling AIG shares. What is unexpected is that such a large chunk of AIG stock will be released into the market at once, instead of spaced out over time.

One reason to shed the stock faster than planned is to credit U.S. President Barack Obama with taxpayer profit ahead of a tight race for the White House.

White House Press Secretary Jay Carney said Monday, "We have been committed to exiting those investments as quickly as practicable. What it does demonstrate is an ongoing commitment to recover taxpayer money. It's safe to say the president is pleased with the progress being made as we wind down these investments."

But even with a multi-billion dollar profit, defending private-sector bailouts is an impossible sell to most voters.

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The Day the U.S. Treasury Rejected My Advice – And Doomed America

By , Global Investing Specialist, Money Morning -

In the mid 1990s, when I was working as a U.S. Treasury advisor to Croatia, I met with the managers of the U.S. Treasury's debt.

In what would turn out to be terrific advice, the Treasury officials suggested that we extend Croatia's debt maturities so the Central European country wouldn't have to refinance too often.

So in gratitude, I offered the U.S. officials some counsel of my own.

I told them they should follow their own counsel and lengthen the U.S. Treasury's average debt maturities, then about six years.

The Treasury officials should have taken my advice. But instead they ignored me and did the exact opposite.

The upshot: Today the United States' debt maturities are among the shortest in the Organization of Economic Cooperation and Development (OECD), and U.S. refinancing costs are exceptionally large.

So if you're already worried about soaring budget deficits and the solvency of the United States, brace yourself - it's only going to get worse.

Refinancing Risks

The U.S. Treasury had more than one opportunity to follow my advice. At the time we opted to extend Croatia's debt maturities, other countries went the other way - with devastating fallout.

For instance, the Ukrainian hryvnia Treasury bill program - where the vast public deficit was financed with 18-month T-bills sold to greedy Merrill Lynch and other foreigners at interest rates above 15% - was one of the major disasters of the 1997-98 crash.

In spite of that outcome, and despite my advice, the U.S. Treasury took the opposite tact by abolishing the 30-year bond issue in 2001. The belief at the time was that Treasury surpluses were so assured that there was no longer any need for 30-year money.

There are two problems with this: First, when interest rates rise, their additional cost will feed through to the budget remarkably quickly, making the financing problem even worse. Second, it increases the risk that at some stage, the U.S. Treasury may not be able to raise the money.

Average Treasury bond maturities reached a low of 50 months in 2009. They've since been lengthened a bit to 62 months, but that still leaves the U.S. Treasury with a major refinancing risk. The Treasury will have to refinance some $2 trillion of outstanding debt in the next year - and that's in addition to the $1.5 trillion of new debt it's going to have to issue in that time.



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Debt Ceiling Woes: Four Moves to Make as a Government Shutdown Looms

By , Chief Investment Strategist, Money Map Report -

U.S. Treasury Secretary Timothy Geithner is once again worried that we're going to hit our debt ceiling (this time by May 16), and the resultant debate has once again brought our government to the brink of a "shutdown."

I don't know why: The entire debt ceiling concept - as well as the investor fear, political-posturing, self-aggrandizing behavior and government-shutdown debates this budget limit repeatedly spawns - is a joke, albeit it a very bad one.

Unfortunately, the speed at which headlines are crossing my desk suggests that the entire affair will turn into yet another Capitol Hill debacle - this one with additional consequences for an already battered Main Street.

But I've got four recommendations that will help you sidestep the government shutdown/debt ceiling fallout, and perhaps even bolster your retirement holdings along the way.

For those four strategies, please read on...

Inflation Fears: A Sanguine Fed is Underestimating the Escalating Threat

By , Global Investing Specialist, Money Morning -

Pretty much everyone but U.S. Federal Reserve Chairman Ben S. Bernanke sees that inflation is returning: After all, even Bernanke's favorite inflation measure, the Personal Consumption Expenditure (PCE) deflator, was up 0.4% in February - which hints at an annualized inflation rate of almost 5%.

What folks don't see, however, is just how bad inflation will get.

To learn how to invest in the face of spiking inflation, please read on...

Read More…

Federal Reserve Report: Central Bank's Record $82 Billion "Profit" is a Red Flag Warning

By , Global Investing Specialist, Money Morning -

If the record $81.7 billion in profit that the U.S. Federal Reserve reported for 2010 was turned over to taxpayers directly, there's no doubt it would have some "stimulus" benefit - after all, a $270 check for every man, women and child in the United States ain't chicken-feed.

But since that money actually just "disappears" into the coffers of the U.S. Treasury, it does very little good for anybody.

Still, since the pretax earnings of Goldman Sachs Group Inc. (NYSE: GS) never got above the $12 billion mark, it's worth taking a closer look at the Fed's reported profits to see just what's going on - especially since we taxpayers will be called upon to bail out the central bank, once the inevitable losses arrive.

And once you take the time to investigate, you'll quickly realize two things - this "profit" isn't what it seems. And you should be worried - very worried - about what's to come.


To see why this "profit" report is a cause for concern, please read on...

AIG to Borrow from Treasury as Part of Exit Plan

By , Contributing Writer, Money Morning -

The U.S. government and American International Group Inc. (NYSE: AIG) on Wednesday announced a deal to accelerate repayment of taxpayer dollars and clear the road for the company to reclaim its independence.

Terms of the arrangement, which were outlined in September, call for the company to borrow funds from the Treasury Department to repay the remainder of its debt owed to the Federal Reserve, leaving the Treasury holding the bulk of the beleaguered company's common stock.

Once the world's largest insurer, AIG received more than $180 billion of bailout funds from the government to help cover investments that vanished during the collapse of the U.S. real estate bubble.

Read More…

Fed's Easing Spurs Treasury Purchases as Banks Shun Lending 

By , Contributing Writer, Money Morning -

Despite the U.S. Federal Reserve's efforts to spur lending by keeping interest rates low and pumping up liquidity with quantitative easing, banks continue to borrow from the government at low rates and reinvest the funds into higher-yielding Treasury bonds.

U.S. commercial banks are buying the most Treasury and agency debt since the Fed began tracking the data in 1950, adding $186.2 billion to their inventories through Oct. 20 bringing the total to $1.62 trillion. At the same time, commercial and industrial loans outstanding have fallen by about $68.5 billion this year to $1.23 trillion, according to central bank data compiled by Bloomberg News.

By tying up their capital in government securities, banks make it more difficult for small businesses to get loans and create jobs, which discourages consumer spending.

Read More…

Don't Get Bullied out of Bonds

By , Contributing Writer, Money Morning -

Bonds have provided a welcome safe-haven for investors seeking shelter from the financial maelstrom of the past two years, offering steady returns while stocks bounce up and down.

Now some analysts are afraid that once the selling of bonds begins it will be indiscriminate, and there will be a bloodbath. But that fear totally ignores the new investment reality in which we're living.

The fact is, stocks won't be crawling out of the gutter anytime soon, and until they do, investors will continue to look elsewhere for a store of value. They have already decided they can find it in two places: U.S. bonds and gold.

Read More…

Will The Fed Fall Back on Treasury Purchases to Fuel Economic Growth?

By , Associate Editor, Money Morning -

Faced with a faltering recovery, the U.S. Federal Reserve today (Tuesday) will again consider ramping up purchases of Treasuries, a policy known as quantitative easing, to promote growth.

The Standard & Poor's 500 Index closed yesterday with a 1.5% gain on speculation that the Fed would at least indicate to investors that it is prepared to take further action to support the economy.

The Fed conducted its last major round of Treasury purchases from January 2009 to March 2010, buying $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies. The Fed planned on gradually reducing its balance sheet as the debt matured or was prepaid.

But last month the Fed signaled it might resume its quantitative easing steps when it voted to reinvest the principal payments in longer term Treasury securities. And with little improvement in the U.S. economy since then, analysts think the central bank is preparing to take the next step.

"The Fed's rhetoric will get the markets ready for the real possibility of expanding their balance sheet at a later meeting this year," Richard Clarida, a Columbia University professor and global strategic adviser for PIMCO, said Monday in a Bloomberg radio interview.

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What's In a Name: Can the U.S. Afford to Call China a Currency Manipulator?

By , Managing Editor, Money Morning -

It seems like every six months the debate over China's currency, the yuan, reaches a fevered pitch: The Washington bureaucrats threaten to label China a "currency manipulator" and Beijing threatens to dump its U.S. debt holdings.

Then, with the imminent approach of a major inflection point - be it a key international summit or major financial report - both sides grudgingly agree that a modest appreciation of the yuan would be mutually beneficial.

However, things could be slightly different this time around. China has routinely ducked calls to revalue its currency, and in doing so greatly agitated the West.

Read More…

The Fed's Treasury Purchase Plan is Just Further Proof That It's in the Denial About the Dollar

By , Chief Investment Strategist, Money Map Report -

This week's decision by the U.S. Federal Reserve to buy Treasuries in an effort to prop up borrowing is further proof that the economy is worse off than policymakers would have us believe. But more than that, the Fed's Treasury purchase plan is just one more reason for investors to anticipate inflation and take steps to protect their money from it.

In case you missed the news, here's what happened...

The Federal Reserve on Tuesday announced that instead of allowing proceeds from maturing mortgage bonds to disappear from its balance sheet, the central bank would take the "modest" step of using them to invest in new Treasuries.

In plain English, that means that the Fed is reinvesting into U.S. Treasuries the money it would otherwise bank from maturing mortgages.

Its goal is very simple: to keep long term interest rates from rising.

Read More…

AIG Bailout Second-Guessed by Government Watchdog

By , Contributing Writer, Money Morning -

A bipartisan Congressional watchdog panel reviewing the government's bailout of American International Group Inc. (NYSE: AIG) has raised doubts about whether U.S. taxpayers "will ever be repaid in full," and concluded that the U.S. Federal Reserve didn't act aggressively enough during the 2008 rescue.

In a lengthy report, the Congressional Oversight Panel also said the bailout had a "poisonous" effect on the U.S. financial system because it demonstrated the government would protect Wall Street firms from their own risk-taking.

The Federal Reserve could have acted earlier to find a privately funded solution for New York-based AIG before deciding on a rescue that transformed banks' financial bets into fully guaranteed government obligations, the panel said.

Read More…

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