Tag : Gold

2010 U.S. will lose their triple-A status

Posted by Mulder Venture at 10:57 am

The Big Trend

Excessive government spending causes foreigners and even our own citizens to continue to shun the dollar, which will continue to decline through 2010. China will begin to let the yuan appreciate, probably with an informal peg to a basket of competitive exporters. The yuan’s appreciation will export inflation to the U.S., not only in the obvious end-products, but also in the form of parts that are manufactured in China and used in assembled products here in the U.S.

Most economists expect inflation to remain flat due to high unemployment. Unemployment will likely remain around 10%, but it is normally around 5%. The dollar’s further devaluation (which by definition, is inflation) coupled with China’s appreciating yuan, will cause inflation here at home, long before most believe.

The Misplaced Assumption

The general assumption for interest rates is that they will remain low throughout 2010, with the Fed raising around mid-year. I expect the Fed to keep the funds rate near 0% through the end of the year and will likely use every arrow in his quiver to keep long-term rates low, at least until the end of April when the current “first-time” home buyer tax credit expires. Upon exhausting what can be done by the Fed, I expect the yield curve to steepen, with the 10- & 30-year Treasury yields rising sharply. Expect the 30-year yield to close above 6.5%.

The Watch List

Watch gold to rise above $1,500 during 2010. Miners, food and clean-water companies will have a good year. Especially companies selling products to the Chinese government or to the growing Chinese middle-class, regardless of the company’s domicile. People who stand to have a good year will likely consist mostly of conservative candidates come next November.

The Bold Prediction

Great Britain’s government debt, followed by U.S. Treasuries, will lose their triple-A status. Heavy deficit spending by Washington will continue to drive the dollar down as more countries and investors become concerned that the U.S. will not be able to pay debts through taxation or budget surpluses. As Treasury rates begin to rise, so will the deficit, both through the government’s overspending and due to the increased interest rate expense on current debt. The expectation, first with investors and then with rating agencies, will become one where the U.S. turns on the printing press. Expect AA+ by end of year.

Risk Aversion Leads Equities Lower, USD Higher

Posted by Mulder Venture at 2:37 am

A new week begins and risk aversion is the dominant driver of FX markets. The broad USD move lower began showing signs of fatigue last week, and after some disappointing US data (durable goods orders, existing/new home sales figures); the markets have reined back their longs in commodities and risky assets.

Gold is having to re-familiarize itself with three-digit prices (trading at $988 vs. highs last week around $1020), and crude oil is down over 8% from this time last week after US inventory numbers last week revealed a glut of crude and gasoline supplies. The euphoria of global recovery always felt slightly overdone and now it seems markets have snapped back to reality somewhat. P/E ratios for the S&P show equities are still expensive; trading around 19 times profit, much higher than historical averages (16.3 over the last hundred years); despite our belief the longer term trend is for appetite to return and the USD to continue lower, for now we respect this correction in the market and will look to the broader indicators of market risk sentiment (Shanghai Composite, Baltic Dry Index) to direct our FX trades.

The G20 did not precipitate any firm policy initiatives; discussion of banker pay featured on the agenda, but this topic always feels like a populist distraction from the more important issues. The communiqué reiterated commitment to continue stimulus measures which should appease any fears of premature exit strategies; it also seems the G20 are leaving themselves flexible to allow for differential withdrawal of stimulus across countries in the coming months.

There’s very little on the data calendar today, but if the previous week has taught us anything it’s to watch out for policy-maker rhetoric. After Mervyn King’s devastating effect on GBP last week and ensuing criticism from traders, the Bank of England responded over the weekend that they were not trying to deliberately talk down the currency, though this provided little  boost to GBP after the fact. Japan’s new Finance Minister Fujii is also learning the pitfalls of easily-misconstrued comments after being quoted overnight that “it would be a mistake to use FX policy to defend industry” and “recent USD/JPY moves not abnormal”. USDJPY dropped on the news, taking out stops through 89.00 before Fujii returned to say that his comments were misinterpreted and were not intended to reflect government support for a strong JPY. USDJPY pared back gains to 89.60 levels, and one can’t help but think the new Fin. Min’s credibility may also have lost some ground in the process.