(http://www.usagold.com/germannightmare.html)

2. How was the Germany hyperinflation different from the US? Central bankers have learned to delay and extend the consequences of printing too much money. Germany was a small state isolated from the rest of the world. Germany had a difficulty find a market for its government bonds. Germany’s deficits had to be financed internally. Large deficits lead to inflation. When currencies can not be redeemed into gold, the currency value depends on the judgment and conscience of the politicians and during a crisis or war the pressure to inflate becomes overwhelming.

3. During war men are at the battle front and not in the market. Necessities are rationed and luxury goods are not easily available. Civilians have little leisure time for spending. Fuel for inflation accumulates in the form of vast hoards of money. Social programs put heavy demands on limited production capacity. During hyperinflation, prices rose faster than money supply suggested confidence was fading faster than factual data.

4. In 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency. Real wages dropped, people ate less, unemployment dropped, but prices rose. Food riots broke out and business shutdown. Some business support inflation to wipe out their debt and profited from speculation in foreign currency trading. Other business borrowed cheap money and buy up their competitor businesses. The drop in the mark value on the foreign exchange indicated that inflation was the culprit for change. “On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion. However, it announced that it was expanding production and the daily issue would soon be 500,000 trillion!”

(http://www.usagold.com/germannightmare.html)

5. What were the effects of inflation on business? Businesses start buying machinery to build factories, buying huge stocks of coal, steel, and raw materials. There was a tremendous conversion of working capital into fixed investments. Shipbuilding expanded beyond market needs. Mines were opened leading to overproduction. Workers were losing their purchasing power. Large firms combined to raise prices, to obtain raw materials, and obtain bank credit. Large conglomerates sprung up in oil, coal, steel, shipyards, electrical works, insurance, newspapers and hotels. Behind the scenes were large amounts of inefficiencies and waste.


Related::Will inflation increase in 2010?

China is experiencing labor shortages in the coastal cities due to increased demand for exportable and consumable products and high unemployment in other regions. Every year 150 million migrant works leave rural areas to look for job in cities, but currently there exists 24 million urban workers, who are unemployed waiting for jobs and 6.3 million university graduates looking for jobs. Wen hopes that workers will stay at home and improve work conditions in these rural areas. Wen is encouraging university graduates to start their own businesses and he has called upon the graduates to work on building businesses in the underdeveloped regions of central and western China.

2. Universal Healthcare: China has about 14,000 public hospitals by November 2009. A $123 billion has been passed by the State Council for medical reform by 2011 to provide universal medical service to 1.3 billion people.

(http://www.chinadaily.com.cn/china/2010-02/27/content_9513842.htm)

3. Increased Foreign reserves: China is worried about the safety of China’s assets and the vast amounts of US government debt. China has $2.4 trillion of foreign reserve currencies. China claims to have bought $1 trillion of US debt. China is accelerating urbanization and industrial development and working on increasing consumer consumption.

(http://www.cnn.com/2009/WORLD/asiapcf/03/13/china.wen/index.html)

4. Preventing a Housing bubble: Wen Jiabao says he will tame the “wild horse” housing market. Price in Jan 2010 had grown 9.5 percent from a year earlier prompting the potential for an asset bubble. Wen said, “The Chinese government will build five million affordable houses this year, after two million were built in 2009. Two million shanty houses would be reconstructed this year, in addition to the 1.8 million completed last year” Wen said the government will also implement land, finance and tax polices to enable more people to buy their own home. Wen, also promised to crack down on corruption and illegal activities, such as, land hoarding designed to drive prices up.

(http://news.xinhuanet.com/english2010/china/2010-02/27/c_13190615.htm)

5. stable inflation: China’s M2 money supply is $8.57 trillion, as of Sep 2009. CPI and PPI are showing moderate increases.

(http://news.xinhuanet.com/english/2009-10/22/content_12298725.htm) 6. A total of 4,960 Chinese officials above the county level were punished for corruption in a year ending November 2008

(http://www.chinadaily.com.cn/china/2009npc/2009-03/05/content_7540274.htm)


Related::Is China comfortable with Fed spending?

2. Investors withdrew $468.5 billion from money-market funds in 2009. Investors are encouraged to take money out of cash and invest in higher yield assets like equities and corporate bonds.

3. Rapid growth in credit inflates the bubble and prices rise but in reality once the overvaluation is done, bond prices have only one direction and that is down.

4. Western investors have shifted $64.5 billion into emerging-market funds in 2009. China has $2.4 trillion in its reserve funds. Hong Kong housing prices are 50% above fair value pricing (http://www.economist.com/displaystory.cfm?story_id=15211520)

5. Speculators are looking to put long-term shorts on US treasuries. (http://www.goldinvestor.com/articles/shorting-treasury-bonds.html)

6. US bond prices should go down and yields go up as the creditworthiness deteriorates. 10 Year US Treasuries are 3.64%. Foreign investors, such as, Japan and Europe will need to invest billions to prevent the yields from rising. The Fed must auction $2.5 Trillion in 2010 to contract the money supply and prevent runaway inflation. The banks will not be able to absorb hundreds of billions of US treasuries on their books. If stock holders flee to bonds then yields could go down. If investors begin question the value and integrity of the US balance sheet then a bond sell off will occur. Selling in a bubble is in the best interest of the investor. When Japan hits the debt wall in the next five year then yield rates will spiral upward. If Bank of Japan prints new yen then the yen will devalue forcing the sale of the $750 billion in US treasuries. (http://goldnews.bullionvault.com/US_treasury_bonds_020420102)

7. Suppose, Commercial bank A borrows $100 from Central Bank B. Commercial bank A buys a bond or government debt for $100, with a yield of 3.6%. The rapid buying of bonds drives the price to 105 and the yield to 3%. Commercial bank C buys at 105 and other commercial banks follow and borrow cheap money to buy the bonds with higher yields. At some point the bond bubble forms and the gap between short and long term gap narrows, the borrow money is not cheap. The group realizes bond price are too high. Commercial bank A sells off his bonds at $105 in the bubble and profits $5, but commercial bank C can not sale without taking a loss as the bond price drops to 101 and may be forced to take a write down on his books.

The problem occurs because the commercial banks can not exit the bond bubble fast enough. They are left with overvalued assets and yields below market. As the bond price decrease the yields increase desirous to attract more buyers. A gap between Asset yield production begins to emerge and commercial banks sense losses in price and potential yield earnings. The commercial banks at this point may decide to cut their losses and exit the government debt by selling the asset. The sell off will cause yields to spiral upward depending on the amount of debt financed.

The degree of the problem will depend on the amount of money borrowed by the commercial banks from the central banks. If greed rules then another financial meltdown will occur, banks will consolidate with bigger banks, and the central banks will demand their money.

Related::Why are we, so clueless about the Bond Market

2. 60-70,000 Hong Kong Factories will close in the Pearl River Delta.

3. A hard landing will occur, if China's GDP slows to 5-6%

4. GDP must stay at 9-10%, to absorb 24 million new laborors enterning the labor pool each year

5. Monetary/Credit and Fiscal policy will not prevent a hard landing.

6. As the Chinese economy slows more non-performing loans will emerge

7. Most of China growth is not coming from exports. Between 2005-2007, net export growth contributed 2 to 3%. China's capital intensive projects are not huge job generators.

http://japanfocus.org/-John_Garnaut/2954


Related::China Plastic slowdown

2. As of Feb 2010, 6.8264 yuan per dollar was the rate

3. China Exchange Reserve rose to $2.4 trillion. Liquity is massive. Banks have loaned over $55.6 billion of new loans. (http://www.businessweek.com/news/2010-01-15/china-reserves-hit-record-2-4-trillion-as-loan-growth-quickens.html)

4. Will the Fed raise interest rates to keep money from fleeing to China, as the Yuan becomes stronger? How fast is money flowing into China?

5. In 2009, foreign reserves climbed about $453 billion to prevent the yuan from appreciating against other currencies and help exports.

6. Speculators are betting that the Yuan will appreciate.

7. If country Y purchases commodities from country X and converts the commodity into finished goods and resales them back to country X then will country Y necessarily increase prices as its buying power increases?

Will country Y produce more finished goods keeping prices stable?


Related::What happens with a strong Yuan?

1. China sold more than $34 billion in short and long-term bonds.

2. China has sold over $45 in the last five months

3. China says it is time to cut US security holdings because of the recent European debt concerns

4. Massive US deficit spending and near-zero interest rates have eroded the value of US bonds. However, after March, bond yields should start to climb, as the fed discontinues buying MBS.

5. The sale off of bonds could be a move to reduce pressure on China to appreciate the yuan.

http://en.ce.cn/Business/topnews/201002/18/t20100218_20975957.shtml

6. China's sale of US securities does not necessarily translate to a loss of confidence. (http://online.wsj.com/article/SB10001424052748704804204575069172269719754.html)

7. The sale of the US treasuries is not political or about liquidity, it is simply a portfolio trade, a random reserve outflow. The sale could be designed to discourage Foreign domestic investment. China may be purchasing securities through other vehicles. China is also buying more US equities through CIC, The China Investment Corporation, the sovereign wealth fund. China may be betting on the US economic recovery.

(http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100218/BUSINESS/702189976/1049)
 

Related::Why are we, so clueless about the Bond Market

2. The German DAX index traded down to 5,518 and the French CAC index declined to 3,630.

3. Jan 29, 2010 US yields were down between 5.5 (2-year) and 1.5 basis points (10- and 30-year), while in EMU yields were down about 1 basis points. Liquidity is rapidly diminishing for France, Netherlands, and Beligium. US GDP is expected to be 2.2% in Q3. (http://www.fxstreet.com/fundamental/analysis-reports/sunrise-market-commentary/2010-01-29.html)

4. Investors' are focusing on creditworthiness of countries rather than companies. Greeces budget deficit ballooned and major credit rating firms downgraded the country’s debt. European rules are supposed to ensure members do not borrow themselves into oblivion. Greeces debt is 13% of GDP or four times the EU limit. (http://www.statesman.com/business/personal-finance/2010-could-be-a-scary-year-for-bond-203939.html?printArticle=y)

5. Investors are demanding higher yields on long term treasuries at 3.6 percent on 10 year treasuries. However, the US market believes the Eurozone will tackle Greeces debt problems. The US market reacted positively after hearing Germany will aid Greece with financial aid. (http://business.inquirer.net/money/breakingnews/view/20100210-252332/US-stocks-rally-on-easing-eurozone-debt-fears)

6. Greek yields and CDS spreads have reached new highs. Credit Default Swaps are negatively impact Greece’s bonds devaluation resulting from the rating downgrade. CDS premium increased in cost as risk increased to insure Greek bonds. (http://www.nytimes.com/2010/02/06/business/global/08euro.html)

7. Investors are putting their money into the Australian bond market for safety reasons. Australia’s economic growth outlook is strong, unemployment low, and debt minimal. (http://www.tradingroom.com.au/apps/view_article.ac?articleId=1094678)


Related::Why is CDS risk costing AIG?

2. Wells Fargo predicts a $3 billion profit. Well Fargo enjoyed strong operating margins, lower costs, and the purchase of Wachovia (Mortgage Heaven). Wells Fargo process $83 billion in applications of Mortgages. The purchase of Wachovia exceed expectations accounting for 40% of the revenue. (http://money.cnn.com/2009/04/09/news/companies/wells_fargo/index.htm)


Related::Fed Exist Strategy

2. In first half of 2010, the fed auctioned $40 billion in 3 year notes and $25 billion in 10 year notes. The fed aunction increases debt supply. The sale of inflation-linked debt (TIPS) will gradually expand. TIP sales could be as frequent as six times a year. The Fed could sell $300 to $400 billion in regular notes and bonds in October 2011. (http://www.fxstreet.com/technical/analysis-reports/the-forex-technical-report/2010-01-21.v03.html)

3. Gold prices ($1108.07 ounce) are dropping as China tightens it money supply and trader fears of inflation subside.

4. 22,000 jobs were lost in Jan 2010 contributing to weak economic job data. The ECB left its key interest rate at 1.00%. (http://online.wsj.com/article/BT-CO-20100114-711770.html)

5. Australia could raise interest rates as its unemployment fell to 5.5% and growth continues to rebound.

6. A strong dollar policy suggests people are confident in the currency or demand buying the currency and a good medium of exchange.

Related::Fed buying spree. Will it every end?

2. In the first quarter of 2009, PBOC new loans topped $670 billion. (http://www.southasiaanalysis.org/%5Cpapers33%5Cpaper3284.html)

3. Alcoa forecasted global consumption of aluminum to rise 4 percent driven by stronger demand from China. (http://www.bloomberg.com/apps/news?pid=20601087&sid=aqqspSwPwMRo)

4. Will credit tightening crash the Chinese Economy? Tim Condon is saying no. China’s GDP could increase to 9.5 percent helped by the new loans at the beginning of the 2009.

5. Chinese Mills produce 660 million metric tons of steel annual.

6. The large amount of lending in China has helped avoid recession. (http://www.marketwatch.com/story/china-targets-11-trillion-in-new-loans-in-2010-2010-01-19)

7. The Chinese consumer is buying TVs, washing machines, refrigerators, personal computers, a house, a car. Affluent buyers purchase 150 square meter apartments or villas and lower and middle income families’ purchase 70 to 100 square meter apartments. In 2004 average prices were $335 a square meter. In 2004, ownership of a private car was 26.4 million. Cosmetics are becoming popular in China and tourism is flourishing. (http://www.sinoptic.ch/shanghaiflash/2005/200506.htm)


Related::China increases lending

2. Investors are looking for riskier short term profit.

3. US Treasury 10 year yield is 3.686% and 2 year yield is 0.872%.

4. The yield curve is steepening. The yield curve is the relation between the interest rate (cost of borrowing) and the time to maturity of the debt in a given currency. Both the 2 year yield and the 10 year yield increased. Bonds of different maturities have different rates or yields.

5. In 1992 and 2003, the yield curve steepened. A steep yield curve means higher yields on longer dated bonds and usually indicates the economy will soon grow. Typically, the yield on 30 year treasuries is three percentage points above the three-month treasury. In 1992, the spread between the short and long term rates was five percentage points indicating the bond investors were anticipating a strong economy. In 1993, the GDP was expanding at 3%. Long term equity buyers started acquiring the high yield bonds. (http://fixedincome.fidelity.com/fi/FIHistoricalYield)

6. In 2010, 2.8 percentage points separate short term and long term bonds. In 2009, the yield curve was normal. Normal yield curves are associated with stock market bottoms. Likewise, inverted yield curves are associated with stock market peaks. (http://www.moneyshow.com/trading/Tips_for_Traders.asp?aid=DAYTRADERS-18567)

7. Banks are making more money and recovering from bad debt write downs. Banks borrow money from the fed at low rates and invest the money in higher yielding bonds earning a carry. The fed soaks up the excess liquidity at the costs of an interest payment to the banks. Recession breed steep yield curves and banks profit.

8. The yield curve will steepen in 2010. The fed is selling record amounts of government bonds. (http://www.ft.com/cms/s/0/898b4acc-ec25-11de-8070-00144feab49a.html?catid=93&SID=google)

9. The cost to borrow will increase as the yield curve steepens. Goldman Sach is predicting 2 year securities at 1.825% and 10 year securities at 4.125% by the end of 2010.


Related::Why are we, so clueless about the Bond Market

2. Germany and France export their way out recession growing output by 0.3% in 2 Quarter. Germany has the largest economy in Europe. (http://www.allbusiness.com/economy-economic-indicators/economic-conditions-recession/12644941-1.html)

3. Many European Union countries in Eastern Europe have problems because of dependence on foreign banks and many of the loans were writing in euros or Swiss francs. Europe has lagged behind the US in performance caused from higher taxes and large government spending. Europe suffers from low birthrate, high retiree counts drawing pensions verses workers, and population loss. The IMF will claim a $4.1 trillion write-down in 2009. (http://www.cato.org/pub_display.php?pub_id=10242)

4. Commercial purchases in Europe total $85 billion lead by Sovereign Wealth Funds, Institutional buyers, and German open-end funds. These investors charge a high interest.

5. UK consumers are cashed out and unable to fund a recovery.

6. China drought caused an increased importation of wheat.


Related::What is the source of the Euro's strength?

Carol Bartz (Yahoo) – Not looking for an upturn in the economy. Bartz has shaken things up at Yahoo, got people to snap-to, cut geocities, battle company inertia, offer new ad formats for cell phones, and outsource search services to Microsoft.

Yahoo, Elisa Steele announced a $100 million global advertising campaign called “It’s Y!ou” consisting of user friends and interest designed attract new customers through a mix of personalized and general content. Yahoo has 600 billion users world-wide.

(http://www.wired.com/epicenter/2009/09/yahoo-unveils-new-strategy-100-million-ad-campaign/)

Gary Kelly (Southwest) – “The economy will be weak”. Kelly believes in not charging customer for services they received free. For more than a year consumers have been paying checked bag fees and fees for a second bag or a heavier bag. Customers hate bag fees. Southwest moves 35 million bags a year. Kelly believes Southwest will remain a magnet for discount seeking customers and the budget conscience customer will drive demand. Kelly is concerned about a jump in energy prices and hedged futures contracts with the expectation of higher energy prices.

(http://www.marketwatch.com/story/air-travelers-face-a-binful-of-holiday-bag-trouble-2009-12-23)

Wang Shi (China Vanke) – Shi thinks that rising real estate prices will cause inflation in China. Shi is in the business of selling dreams. Freedom in China is allowing consumers to accumulate wealth, have a voice in community affairs, and choose where and how to live.

Shi is concerned the enormous amount of credit caused from the doubling of new loans since 2008 will cause overcapacity and excess. Shi warns of a real estate bubble and the potential of overcapacity causing deflation. Excess money produces overcapacity and fast growth systematic lessens the risk perceived by investors. Bubbles form when there is too much debt and not enough revenue

Deng Xiaoping housing reforms paved the way for more western approaches to private property ownership. As incomes rose in the 1990s and mortgages became available more people bought homes. Land is controlled by the state, government officials exert pressure on developers for unit size and price. Corruption scandals are often associated around Chinese real estate. A new middle class emerged in China. Vanke controls 2% of the Chinese home building market and develops in 30 cities.

(http://www.nytimes.com/2008/04/06/realestate/keymagazine/406china-t.html?pagewanted=print)

Jim Rogers says that the Chinese economy is not based on real estate speculation. However, Rogers warns of 1970s like inflation and spiraling price increases. Rapid inflation could lead funds being trapped and restrictions on outflows of currencies. Rogers is buying commodities because the demand for commodities continues to rise. Roger does not believe inflation is a threat to China. The dollar and yuan should remain stable through 2010. The Chinese stimulus spending of $587 billion keeps demand for commodities in Copper, Coal, Iron, and Oil strong.

Richard Adkerson (Freeport McMoran Copper and Gold. – Adkerson experience a banner year. Chinese demand for copper kept prices at $3 a pound; Adkerson expected $1 a pound. Gold prices rose to $1,217 an ounce. Tight supply will help keep prices strong through 2010. In 2009, Freeport sold about 3.9 billion lbs of copper and 2.3 million ounces of Gold and 60 million lbs of molybdenum.

Will the Chinese purchases of copper continue support long-term? Freeport-McMoRan Copper and Gold believe that China’s economic growth and infrastructure development will keep consumption of copper strong. Infrastructure development that uses copper includes: housing, transportation, railroads, and power facilities.

(http://www.reuters.com/article/idUSN2253316720090422)

Robert Taubman (Taubman Centers) – Taubman is optimistic observing widespread improvements in retail sales. The downturn was painful, but Taubman believes the consumers are inching themselves back up moving from purchases at discount stores to high-end retail.

James Young (Burlington Northern Santa Fe – Buffets $26.3 billion investment) – Young is waiting for an economic rebound. Young expected industrial good shipments to be stronger than current levels. Young thinks railway transportation will take more business from trucking companies by offering speedy deliveries and lower capital expenditures. Young sees railroad regulation as a risk.


Related::China could be the first country to recover from the low.

Referenced by:
   How does inflation affect businesses?

1. As of July 2009, 1st half, imports from China to Japan fell 28.7% or 9.8 trillion yen and exports fell 32.1% or 4.4 trillion yen. The first decline in 11 years.

2. At the peak of China’s trade with Japan, it rose to 20.4%

3. Japan exports machinery related products fueled by the Stimulus plan directing the building of build infrastructure: roads, railways, and shipping. Japan exports textile machinery to China.

4. Japan exports: lightning oil, kerosene, mineral fuels, cars, and semiconductors to China. Will China continue to import Japanese semiconductors or will they build their own chips?

5. Japanese consumers will turn towards inexpensive clothing and food from China

6. The overall amount of imports of low cost parts and materials will decrease.


Related::Why did Japanese exports to China decline?

2. Japan, South Korea, and Taiwan export products to developing countries of China, Thailand, or Vietnam. China finishes the product, and exports the product to the US. Japan exports declines are linked to declines in imports of finished goods from China by the US. China receives payment for the products in US treasuries.

3. Consumer demand has shifted from high-end items to inexpensive goods. Walmart is experience a boost in consumer purchases shopping for bargains.

4. In 2007, Japan exports to the US have decreased by $600 million for intermediate goods

5. In 2007, China exports of intermediate goods to the US fell, $300 million.

(http://www.voxeu.org/index.php?q=node/3637)


Related::China and India - To small to replace US consumption

Referenced by:
   How much did Japanese exports to China decline?

Increased reserve ratios will strengthen the yuan and the dollar.

The Fed will start issues term deposits after March 2010 and long term yields will rise and the dollar will gain in strength.


Related::Why are banks holding large excess reserves?

Referenced by:
   Banks report record payouts and revenues

2. Measure 1: Increase the supply of low-cost houses for low-income families and common residential houses.

3. Measure 2: Encourage reasonable house buying while restraining purchases for speculation and investment.

4. Measure 3: Strengthen real estate project loan risk management and market supervision.

5. Measure 4: Speed up construction of housing projects for low-income households.

6. Measure 5: Increase land supply for resident housing projects

7. Measure 6: Restrain purchase for speculation and investment. A second home-buyer will need to have a down payment of 40%. China is attempt to slow overseas speculation and profit taking. The Ministry of Housing and Urban-Rural Development are taking measures to crack down on property developers that are hoarding land or houses for profits.

8. Measure 7: Deny Loans to developers who fail to meet the minimum amount of capital needs to jumpstart a new commercial property.

9. Measure 8: Ask the Peoples Bank of China and China Banking Regulatory Commission to enhance supervision of property credit.

10. Measure 9: Step up development for cities with high house prices and excessively rising house prices to build more affordable or low-rend housing projects.


Related::China Real Estate prices

2. The government will have pay down its debt and not inflate it away.

3. Bondholders will raise interest rates more than inflation, to compensate them for future inflation. “Losing credibility is costly”. Megan McArdle says, “the monopoly to print money becomes worthless when the demand for the currency goes to zero.” In past debt, the government borrowed money to secure real goods in the economy rather than raise taxes. (http://meganmcardle.theatlantic.com/archives/2009/10/seriously_stop_worrying_about.php)

4. In the US many of the mandatory government payouts are inflation indexed.

5. The US does not finance its deficit through issuing debt.

6. When a Treasury sells a bond, the reserve account is debited and the treasury account credited. Reserves have to exist and the transaction completes as monies from the buyer reserve account are transfer to the Treasury reserve account. The structure has changed not the amount owing. When the bond matures the buyer of the bond gets the reserve dollars.

7. The real wealth of the economy is production.

8. Tax work to reduce demand.

9. When foreign countries buy Treasuries, they are not funding government spending. When foreign countries buy Treasuries they are funding foreign savings.


Related::Why are we, so clueless about the Bond Market

2. 15/27 countries are using the Euro as the currency of their central banks

3. Martin Feldstein says, “The current differences in the interest rates of euro-zone government bonds show that the financial markets regard a break-up as a real possibility”. Europes bond yields will continue to rise. The yields rise to keep money from fleeing out of the euro. Bonds in Greece and Ireland play a full percentage point above comparable bond rates in German and Italy.

4. Countries in the European Union could withdraw, if they want to. Countries fearing that chronic depression may leave the EU providing it the opportunity to devalue its currency, inflation. However, inflation is not the escape from depression; production is the only escape from depression. (http://www.project-syndicate.org/commentary/feldstein5/English)

5. Europe must and will continue a policy of tight credit. Europe is thought to have more bad debt than the US and no lender of last resort.


Related::What is the source of the Euro's strength?

In 2005, the European commission relaunched the Lisbon Strategy. Agri-food sector accounts for 14.2% of EU manufacturing output and rural areas cover 90% of the EU territory and home to 50% of the population. EU focus on small scale local infrastructure development and government aid. The Lisbon Strategy focuses on education and training, research and development, and promotion of innovation.

Agriculture and forestry are the largest land user reshaping rural environment and landscape and source of jobs and growth. EU touted CAP as a success.

http://ec.europa.eu/agriculture/lisbon/index_en.htm

Lisbon claims to have created 18 million new jobs. In 2008, Europe reduced unemployment to 7%. The EU goal is to create an online single market and transform its worker base into a knowledge-based economy. EU is projecting higher energy prices, carbon constraints, and greater international competition from China. EU will spend more money too expand transportation infrastructure. Europe’s existing industrial has been shrinking. EU is looking to create new industrial innovation capacity and manufacture new technologies by fostering entreprenuership.

(http://www.co2-handel.de/article185_13071.html)

The three goals of Lisbon are: full employment, supervising a new working environment, and increasing worker mobility. The end product will be a common market and a common community. http://www.turkishweekly.net/article/124/structural-development-of-the-european-union-social-dimension-and-the-lisbon-strategy.html

What is the European Union?

The European Union is a union of 27 countries incorporating 495 million people with a $16.78 trillion GDP. Members include: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom.

Treaties include: Rome treaty of 1957 and 1998 Amsterdam treaty and Maastricht. http://www.wolframalpha.com/input/?i=european+union

The Whole of Central European Manufacturing is contracting

1. German Manufacturing Orders are trending downward

2. Spain's Manufacturing PMI is contracting

3. Czech Republic PMI is contracting

4. Poland PMI is contracting

5. Hungry PMI is contracting

6. China PMI is contracting

What is the European Model?

The European model is characterized by close supervised finance, industry, and labor and generous state-run pensions and health care

How does the Ukraine affect the Euro?

The Ukraine was once a territory of Russia. When the Soviet Union broke up then Ukraine became its own sovereignty.

Ukraine plays an important role in Europe's Energy availability. A pipeline from Siberia to Western Europe provides 80% of Europe's natural gas. Without the natural gas Europeans have to cut wood to keep warm during the winter. Historically, Russia has subsidized Ukraine gas too keep relationships friendly. The State Owned Gas companies of Ukraine owes $2 billion to Russia's Gazprom. 2006, Western Europe experience energy availablity disruption.

Today, Ukraine is suffering from lower Gas prices and production.

(http://www.financialsense.com/editorials/engdahl/main.html)

In 2009, Ukraine political views diverged from Central bank and gas trade viewpoints. Coal production missed the target of 80 million tons producing 79 million tons and sunflower seed crush dropped 16%. Between Jan-Oct output dropped 26-28% with chemicals and steel hardest hit; Benezene production dropped, gas supplies dropped, an exported slowed. Total exports for nine months of 2009 was $34 billion. Predicted growth in 2010 for Ukraine is expected to be 3%.

The IMF has $16.7 billion loan with Ukraine.

Gas deliveries to Europe in 2010

1. The European Comissioner of Europe does not rule out disruptions of gas deliveries in 2010

2. Brussels is hold Kiev responsible to ensure gas deliveries are maintained.

3. The European Union has voiced that new gas conflicts between the Ukraine and Russia are not admissible. The EU said it would not keep its commitments to improve Ukraines gas-transport system. The IMF allocated $1.7 billion to improve Ukraines gas transportation system.

4. 25% of the gas coming into the European Union is transported via Ukraine.

(http://english.ruvr.ru/2009/12/08/2842821.html)


Related::Why are we, so clueless about the Bond Market

Referenced by:
   Tighter Monetary policies

   EU predicts growth 2010, writeoffs, and export surges

2. The RMB will be allowed to float against the dollar. RMB will be allowed to float within a narrow band of 0.5%. (http://en.wikipedia.org/wiki/Renminbi )

3. The renminbi value is around 6.83 per U.S. dollar since July 2008

Related::Why are we, so clueless about the Bond Market

2. Plan 2: The US needs to decrease money supply. The Treasury sells of US treasuries and decreases the M2 money supply. Yield rates increase and security prices decrease. The liberal monetary policy has caused dollar depreciation because too many dollars exist in the system. A large sell off of dollar denominated securities would cause US security yields to rise (long-term, short-term, corporate loans, and consumer loans).

3. China uses the Renminbi (RMB) to keep currency stability and maintain exports for Asian countries. China’s RMB pricing has lead to asset inflation in other countries. Both the US and Euro currencies have devalued. Israel, Norway, and Australia have raised their interest rates to slow inflation. What happens when the Chinese government reduces selling of the RMB? How will M2 money supply be affected? In 2nd Quarter of 2010, the yuan is expected to move away from the dollar. The RMB decoupling from the dollar will be inevitable. The Yuan will be pegged to a basket of other currencies. (http://www.sourcejuice.com/1278304/2009/11/23/Post-crisis-era-China-dollars-trap/)

Related::Why are we, so clueless about the Bond Market

2. Japan's total holdings of Long Term Bonds was $747 billion.

3. Net purchases of Long Term US securities decreased due to rising oil prices and weaker dollar

4. What happens if crude oil prices drop? A slight increase in the sale of US Treasuries could occur; the dollar could strengthen; and inflation indicators decrease. Less demand for crude oil could also signal that the economy is slowing down.

5. Month to Month bond volatility exists. However, large scale dumping of dollars by China and Japan does not look like a trend.
Related::Why are we, so clueless about the Bond Market

2. Daily crude steel output of China's 71 large and midsize steel-makers averaged at 1,249,100 metric tons, Pig Iron 1,206,100 tonnes, steel products 1,143,500 tons. (http://news.e-to-china.com/industry/Business/News/2009/1125/71044.html)

3. Chinese official moves against inflation will increase the cost of capital. Increase cost of capital will increase the number of non-performing loans.

4. China does not control the price of oil. Higher prices in oil could increase inflation rates. (http://www.kciinvesting.com/articles/10176/1/Dont-Worry-about-Inflation-in-China/Page1.html) 5. In 2008, Rising energy and raw material costs and a falling dollar are forcing Chinese factories to increase the price of their exports, 2.4 percent over 2007. Chinese imports represent 7.5 percent of spending by Americans. (http://www.nytimes.com/2008/02/01/business/worldbusiness/01inflate.html) 6. Poly Real Estate, China’s second-largest developer, plunged 7.5 percent to 21.88 yuan today, its ninth straight loss. China Vanke dropped 6 percent to 10.59 yuan, the most since Sept. 30. http://www.bloomberg.com/apps/news?pid=20601206&sid=auKk5dlX_LAQ

6. In the first 9 months of 2009, new home mortgages rose $139.5 billion, nearly quadrupling the amount offered in 2008. The real estate growth rates faster than the economic growth rate, a bubble. (Chinese Central Bank)

7. For 2009, Hong Kong, Beijing, and Shanghai showed the fastest pricing climbing in China.

8. A stronger Yuan would slow down real estate speculation by making the exchange rates higher.


Referenced by:
   Real Estate Bubble has still a long way to fall

   Stabilizing China's Real Estate Market

2. The rapid growth of the CMBS market resulted from flipping commercial real estate and profits from buying and selling

3. Delinquencies is predicted to hit 4.2% by 2010 from 475 transactions totaling CMBS $553.1 billion. (http://www.marketwatch.com/story/commercial-mortgage-delinquencies-to-double-in-2009-fitch-says)

4. In 2009, CMBS delinquencies rose to more than $23 billion (http://www.housingwire.com/2009/12/11/cmbs-delinquency-jumps-most-in-november-moodys/)

5. America has a $6.5 trillion commercial real estate market, 50% is financed. $500 billion are coming due in 2011. Commercial loan holders are unable to payoff their loan. (http://www.thebigmoney.com/articles/judgments/2009/04/24/next-financial-explosion)

6. Money flowing out dot.com moved to commercial mortgage backed securities.

7. Consumer spending has declined 4.3% as of year-end 2008 (http://www.commercialbanc.com/z-article-cmbs-conditions-bad.html)

8. DBRS notes $3.2 billion in fixed-rate multifamily CMBS in default in the United States (http://www.multifamilyexecutive.com/cmbs/cmbs-defaults-expected-to-soar-in-2009.aspx)

9. Real Estate Investment Trust REITs tapped the CMBS market. The huge inflows of investment money created a market bubble. Moody is predicting CMBS prices to fall 35% from their peak. In 2009, prices were 22.8 percent from peak. Real estate investment trusts are built on commercial loans. (http://www.reuters.com/article/idUSN127637120090612) (http://www.dsnews.com/articles/commercial-property-prices-sink-to-2002-levels-report-2009-11-30)

10. Non-traded REIT pay dividends out of investor proceeds. (http://www.reitwrecks.com/2009_05_01_archive.html)

11. CMBS dropping yields indicate the profits earned from the securities are decreasing. Apartment complexes and shopping malls are not earning big profits.

12. General Growth Properties is the largest REIT in America. General Growth Properties filed for bankruptcy. The company owns 200-plus malls, faces $5.5 billion in commercial real estate loans due in two years.


Related::Why are we, so clueless about the Bond Market

2. "The shrinking trade surplus and expanding forex reserves in the third quarter this year indicate hot money influx is rising again," said Sun Mingchun, chief China economist of Nomura Securities.

3. Hot money should cause the yuan to increase in price. However, Chinese government officials are printing more yuan to resist an strong yuan.

4. "With a large hot money inflow, China will have no choice but to let the yuan appreciate or to create more liquidity in order to maintain a stable foreign exchange rate," said Zhuang Jian, a senior economist with the Asian Development Bank.

http://www.china.org.cn/business/2009-10/21/content_18740893.htm

5. In 2008, about $88 billion in hot money from hedge funds flowed into China.

6. Economists estimate that the amount of Hot Money poured into China is in the order of US $200 to $300 billion dollars, which is equivalent to 10% to 15% of China´s foreign exchange reserves (between US $ 1.7 to US $1.9 Trillion dollars).

(http://chinadigitaltimes.net/china/hot-money/ )
 

Related::Why is China resisting a Strong Yuan?

2. China joined the World Trade Organization in 2001. China agreed to lower tariffs and abolish market impediments.

3. U.S. agricultural exports have increased dramatically, totaling $12.2 billion in 2009, making China our fourth-largest agricultural export market.

4. In April 2009, the United States and China announced that the Joint Commission on Commerce and Trade (JCCT) will continue to serve as the primary venue for the two countries to discuss trade issues

5. China exported $1.3 billion in tires to the United States in the first seven months of 2009 (http://www.nytimes.com/2009/09/14/business/global/14trade.html)

6. United States buys $4.46 worth of Chinese goods for every $1 worth of American goods sold to China

7. U.S. exports to China totaled more than $30 billion for the first six months of 2009. This is a 15% drop in U.S. exports to China during this period (http://www.export.gov/articles/marketofmonth/eg_main_020391.asp)

8. China has a growing number of people in the middle class and they are ready to consume. Chinese consumer spending accounts for 20 percent of their GDP.

9. China Trade Statistics (http://www.uschina.org/statistics/tradetable.html)


Related::Why are we, so clueless about the Bond Market

2. If the banks unleash the excess reserves it will cause excessive velocity, hyperinflation.

3. The banks are holding excess reserves in a pattern indicating the Federal Reserve's liquidity facilities have been ineffective in promoting the flow of credit to firms and households.

Mark to Market plays a role in write downs that are forcing banks to remain conservative in loaning policies. If the housing prices are declining, banks have to write down the loses through daily balance sheet reporting. Loan out money during a period of declining prices would increase the amount of losses banks would have to report.

3. Banks are holding large excess reserves to protect against future defaults on CDOs, MBS, and CMBS. the Excess reserves is a protection against deflationary Real Estate pricing.

4. Excess Reserves are deposited with the Federal Reserve System or an approved depository Bank. Excess reserves can be used to loan to other banks, customers, or corporations.

Banks can loan up to 10 times the excess reserve amount. The Fed can expand or contract the excess reserve through discount lending rates and buying/selling US treasuries. The Financial institutions that buys the US treasury pays by check and the Fed removes the money from the system.

http://www.finweb.com/banking-credit/the-federal-reserve-system-pt2.html
 

Related::Why are we, so clueless about the Bond Market

Referenced by:
   Fed Exist Strategy

   What is the relationship between Gold and Banking reserve ratios?

1. In Dec 2008, China announced it would increase its money supply 17% in 2009

China has order banks to loan $1.1 trillion in 2010. There was 2 trillion in loans reflowing in 2009.

Quote By taking into account the reflow of about 2 trillion yuan, the amount of loans next year could be almost the same with that of 2009, according to the report. End Quote

Quote After a year of record lending, most Chinese commercial banks face decreases in their capital adequacy ratios. End Quote

The rate in which China banks can keep loan money to business can not be sustained because of inadequate reserves. The banks must be able to capitalize on their investments to survive.

http://business.globaltimes.cn/china-economy/2009-12/492350.html

2. The increase in money supply was designed to stimulate domestic demand.

3. The Chinese stimulus package was initiated to spend $586 billion on public projects.

4. The Central Bank stopped issuing three-year bills and reduced issuance of one-year and three-month bills providing more liquidity.


Related::Why are we, so clueless about the Bond Market

Since, July of 2008, the Yuan has rose by 21% against the dollar. The State Council decides Yuan exchange rates and The Minister of Commerce does not favor a Yuan currency adjustment. China is experienced 25% decrease in exports over 14 months. Lui Minkang, China’s chief banking regulator criticized the US for low interest rates and a devaluing dollar. Minkang sees the reserve currency as a Chinese asset and Minkang wants earnings on the asset and high valuations.

A stronger yuan would help increase US exports to China and reduce trade deficits. China would be importing, US monetary policy, increase hot money inflows, expanding real estate investments, and increasing industrial development. Since 2008, the yuan has risen against every currency except the yen. The Chinese stimulus spending has produced a 12% GDP growth.

There is little overlap between Chinese and America production. American goods cannot replace Chinese imports. An increase of American exports to China would help shed debt and increase productivity in US. China quality of life would increase and investments in China would increase.


Related::Why are we, so clueless about the Bond Market

Referenced by:
   Hot Money inflow increasing in China

2. China has been able to control inflation by raising reserve requirements of commercial banks and selling RMB denominated bills. State own and controlled banks have absorbed the bulk of RMB denominated bills.

3. However, China’s economy is shrinking. China’s economic growth is slowing down as exports are dropping. The historically fast growing of double digit GDP has absorbed its inflation. Stimulus spending has not import export percentages. As growth slows then inflation increases in China.

4. Chinese banks are hoarding cash and delaying payments on personal credit cards (http://www.marketoracle.co.uk/Article8320.html)

5. China has accumulated large sums of US dollars: long term US treasury securities, agency securities, corporate securities, stocks and equities, and short-term debt.

6. When hyperinflation sets in China then China will stop printing yuan and begin selling dollars in exchange for the yuan, the yuan will appreciate in value and attract foreign purchases by Central banks making the yuan the reserve currency. At the same time Chinese exports will fall and domestic consumption will increase as the yuan appreciates. Chinese imports will rise and a new commodity bull will start.

7. Today, China signal some indication that it will reduce reserves in dollars. China will sale the US dollar and trade it for tangible assets. This is a form of profit taking.

8. China’s economic growth has been export driven

9. As the dollar depreciates many Central banks are switching from dollar assets to assets denominated by other currencies. The bulk sale of US treasury securities will cause bond prices to decline and yields to increase. If GDP drops as a result of the sudden change in Chinese foreign reserve accumulation of US treasuries then the dollar will devalue. Consumption decreases and recession sets in. The drop in bond prices will cause the prices of stocks to fall. Stock prices during inflation are overbought. Debtors and creditors would face insolvency, as they would be unable to collect their debt. Chinese product prices would adjust upward. Sharp increases in Chinese product prices would send manufacturing back to the US. (http://www.semp.us/publications/biot_reader.php?BiotID=520)

10. China Investment Co was capitalized with $300 billion and charged to invest in higher yield assets.

11. China is seeking refuge. China is expanding into capital-intensive production and high technology products. China labor wages are increasing. The Era of America getting cheap imports and interest rates and China getting strong manufacturing is changing.

12. China is becoming one of US largest export market. The US sees China consumption as the future. Will Chinese consumption of US goods be able to fend off hyperinflation?
 

Related::Why are we, so clueless about the Bond Market

2. The economy will absorb the full weight of adjustments to the deleveraging of bad debt and the massive increases in government liabilities.

3. The stock market will not sustain durable market gains until the second wave of losses shake out.

4. Commercial Mortgage Backed Securities will report large losses. Deutsche Bank announced that the $154 billion of CMBS loans coming due between 2009 and 2012 will not qualify for refinancing. The $700 billion CMBS market is one of the worst performing sectors. CMBS will not be eligible for TALF. In 2009, CMBS loan delinquencies rose to 8.78 percent.

5. John Hussman says, “US Exchange rates and interest rtes will revert to form.” First asset markets collapse. Declines in real housing prices average 35 percent spread over six years and equity prices collapsed an average of 56 percent over three and half years. Second, the aftermath of the banking crisis is associated with profound declines in employment. Third, the value of government debt tends to explode. The biggest increase in government debt is the collapse of tax revenue.

Australia housing prices have not reached an equilibrium. Australia housing prices are due to decline as supply increases and demand decreases. Real Home Prices in 1997, were an index of 103 and 238 in 2006 and returned to 151 in 2009. 103 is 68% of 151. Real housing price have a strong downside potential.

2. By hiding losses and taking proper write-downs, US banks are condemning their stature as global banking leaders.

3. The treasury is trying to blow another bubble within a bursting bubble.

4. We are entering a period of extreme distress with an increasing number of loans due and loans past due greater than 90 days. The credit deterioration trend is climbing. The foreclosure rate as a percent of total loans is approaching 4%. ARMs have twice the delinquency rate as fixed rate loans.

5. http://www.zerohedge.com/article/we-are-still-very-much-bubble-yet-many-analysts-are-preaching-recovery-why


Related::China Real Estate prices

2. Bond investors are creditors

3. Bond investors worry about anything that will prevent them from getting their money back.

4. Fixed income investors are attuned to near-term risks in the economy.

5. Bond traders look at yield curve to make the statement that the economy is recovering. Increased bond yields means their demand for the bond has decreased. If the fed start selling bonds then the yield will increase. The selling of bond decrease money supply and cools down the economy.

6. When short term bond yields and long bond yields are about the same it means that scared investors are buying up bonds and weighing down long-term yields.

7. http://money.cnn.com/2009/08/31/pf/funds/bond_yields.moneymag/index.htm


Related::Why are we, so clueless about the Bond Market

2. Cheng Siwei, said, “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currences.”

3. China’s reserve currency is more than $2 trillion.

4. Gold has been one area the Chinese have been buying. China has been a driving force in the Gold market.

5. Mr cheng said, “If we raise interest rates, we will be flooded with hot money.” China faces the risk of a real estate bubble. China has lost 20 million jobs.

6. (http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html)


Related::Why are we, so clueless about the Bond Market

Referenced by:
   What did Wen Jiabao say to the public?

2. The fed purchased $23 billion + $24 billion and treasury purchased $14 billion + $71 billion of Fannie Mae/Freddie Mac debt and committed to a total purchase of $200 billion. Fannie and Freddie have over $5 trillion in MBS and $1.6 trillion in debt. (http://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae_and_Freddie_Mac)

3. The fed purchased X of long term US treasuries with a total commitment of $300 billion. (http://en.wikipedia.org/wiki/United_States_Treasury_security) (http://www.dailyreckoning.com.au/federal-reserve-to-buy-300-billion-in-us-treasury-bonds/2009/03/19/)

4. The fed purchased X of Term Asset back Securities Loan Facility (TALF). The facility supports the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and SBA loans. The Federal Reserve Bank of New York will lend up to $1 trillion to holders of AAA-rates ABS back loans. These will be non-recourse loans. The TALF money does not originate from the US treasury. TALF is designed to increase credit availability. (http://en.wikipedia.org/wiki/Term_Asset-Backed_Securities_Loan_Facility)

5. The fed spent $4.5 trillion dollars for 2009.

Related::Why are we, so clueless about the Bond Market

Referenced by:
   Towards a stronger dollar

1. Bonds and stocks are securities. Bondholders have a creditor stake in the company, whereas, stocks have an equity stake in the company. Bonds can be issued in foreign currencies. Issuing bonds in foreign currencies gives the issuers the ability to access investment capital in foreign markets. The proceedings from the bonds can be used to break into foreign markets, convert into local currency through the use of foreign exchange swap hedges. Foreign issuer bonds can be used to hedge foreign exchange rate risk.

2. Bonds par value is 100% of face value. Bonds prices can be above par, a price greater than 100; or below par, a price below 100. Most US bonds are sold in denominations of $1000. A bond selling at a discount price of 75.26 indicates a selling price of $752.60 per bond sold. As the bond approaches maturity is par value approaches 100%. Bond yield and price of a bond are inversely related. The market price of a bond is the present value of all expected future interest and principal payments of the bond discounted at the bonds redemption yield or rate of return. Bonds trade in over the counter markets and not through a central exchange or trading system.

3. The foreign exchange trade about $3.98 trillion a day. Trading in the world's main financial markets accounted for $3.21 trillion: $1.005 trillion in spot transactions, $362 billion in outright forwards, $1.714 trillion in foreign exchange swaps, and $129 billion estimated gaps.

4. Trading in London accounts for $1.36 trillion per day. Second and third place trading locations are New York City and Tokyo, Japan.

5. Globalization has transferred money sovereignty to central banks.

6. The Foreign Exchange has allowed investors to move money through foreign exchange in various currencies. The capital is beyond political control.

7. Exchange traded FX futures contracts were introduced in 1972 allowing countries to trade in FX derivative products.

8. Foreign exchange trading increased 38% between April 2005 and April 2006 and double since 2001. Hedge funds and pension funds are using the foreign exchange to manage their fund assets.

9. In 2008, ten of the most active traders accounted for 80 percent of the trading volume.


Related::Why are we, so clueless about the Bond Market

The fed doesn't have enough assets to soak up all the liquidity created in the system because of Bond price par is discounted. Discounted par value mean higher yield and double digit yield rates are expected.

The interest rates could rise to 10-30 percent by 2012.

High interest rates curb inflation and create massive problems for growth. High interest stop economic recovery, drop real estate prices back to the mean.

The bond market bubble will severely affect the stock market in unknown ways. The Stock Market will revert back to the mean of 15 - Price Earning ratio during the economic crisis. Will we see a 7,000 or 8,000 stock market?

Shorting is the way the capitalist remove inefficiency and overvaluation from the system. Hedge funds profited by shorting the CDO using CDS predicting a housing market bubble.

I don't believe in Market timing, the future of stock prices are unknown. I'm talking about a systematic correction not a short-term move. The stock market will have volatility of rally and crash, correction and error. At one moment the money flows in and the other moment the market traders capitalize and take profits. The traders pick pockets and transfer money from the inexperienced traders to the experienced traders. The technical systems execute trades automatically and causes wide swings in price with very unpredictable patterns.

Indexes have the best diversification against risk, but they are not immune from systematic problems.

Commodities are correctly correlated to inflation. WSJ has been promoting futures. However, futures have a no limit liability attached to it. You can end up owing more money by leveraging and trying to buy yourself out of a wrong position. I think futures should be bought on a commodity that can be sold. Buying and selling contracts is like market timing, there is no long term value because of the margin of safety is too low.


Related::Why are we, so clueless about the Bond Market

As bond yields rise investors look for companies with resilient balance sheets. Financial healthy companies receive investor funding during difficult times, while debt heavy companies don't get investor funding and face default.

Yields on Treasuries affect interest rates on Mortgages and auto loans. When Treasury rates go up, the cost of buying the house or car increases. The higher cost is either passed on to the consumer through higher prices or passed to the producer and shareholder through less profits.

China dependence on exporting goods to the United States could lessen and lower the need for China to buy dollars to hold down the exchange rate may decrease.

Economic Slow-downs affect the price of commodities. Dreams of a commodity bull have been held up by Chinese Stimulus spending, short term.

What happens to the Stock Market when the Fed withdraws $1 trillion from the financial markets?

1. Brian Sack is tasked with the job of determining how to sell $478 billion in Bonds, first quarter of 2010. The Fed will soak up the money supply, credit will get tighter, real estate prices will decline and costs increase, GDP will remain consistent and slowly strengthen shedding debt, savings and asset accumulation will increase, the dollar will increase in value and imports increase, and government spending will have pressure constraining spending and contract moving to an isolationist stance.

2. Brian Sack received his PhD from Massachusetts Institute of Technology in 1997. Sack's dissertation advisor was Olivier Blanchard, chief of the International Monetary Fund. At age 39, Sack's runs the Market group of the Federal Reserve Bank of New York.

3. Rising Bond Yields signals that inflation is rising. Commodity prices are correlated to inflation.

Why haven't we felt the affects of a 20 fold increase in money supply, 1980-2005?

1. 60-70% of the money has gone abroad and so consumers have not felt it in prices. If we didn't have China, we would have a closed system and prices would be off the charts. China's accumulation of dollars has delayed inflation and not stopped it. (Peter Schiff Crash proof)

The Market Group buys and sells Treasury securities to control interest rates. The Market Group during the crisis bought about $900 billion worth of Mortgage Back Securities and $300 billion in Treasuries and $250 billion in asset backed securities. The Treasury yields dropped and bond prices increased. Banks earned billions of dollars in profits.

What happens to commodity prices when bond yields rise?

1. Commodity prices should start to decline as yield rates increase. The yield rate reduces inflation and commodity prices should decline, long term.

What happens to the money supply when the fed sells off $478 billion in Bonds and removes the money from the money supply starting next year?

1. The Money supply should contract by $478 billion dollars.

How many securities does the Fed control?

1. The Fed holds 20,000 securities

Why do the top 500 largest Institutions keeping available $994 billion in cash and short term investments, 11% of assets.

1. The top 500 largest Institutions are internally predicting tighter money supply and credit, in the future by their actions. Large companies don't like to hold large amounts of cash.

2. When Bond Yields climb, the dollar strengthens, and cash is a defensive valuation strategy.


Referenced by:
   2010

   What is the relationship between bonds and foreign currencies?

   Fed buying spree. Will it every end?

   Is China comfortable with Fed spending?

   What are bond investor worried about?

   How long will China inflate its money supply?

   Why is China resisting a Strong Yuan?

   China will increase its money supply 17% in 2009

   Why are banks holding large excess reserves?

   US export trends to China needs to be increasing, not decreasing

   Commercial Mortgage Back Securities yields

   Dec 2009 - Long Term Bond

   What happens when China stops selling the Renminbi (RMB)?

   Is the Yuan and the Euro linked?

   What is the source of the Euro's strength?

   When foreign countries buy Treasuries they are funding foreign savings

   The Bond Yield Curve will continue to Steepen

   How does China's sale of $34 bil in Bonds affect the Market?

   Are commercial banks causing a Bond Bubble?

2. In 2007, Paulson and Company made $15 billion. Paulson bet the housing market would turn. Paulson started buying Credit Default Swaps (CDS) insurance policies. Paulson believed the CDS premiums would raise as Mortgage defaults increased and he would sell the CDS at a profit. Paulson was willing to lose 8% a year to buy the Insurance policies. By 2006, Paulson had managed to raise $147 million and launched his fund. Paulson met bankers at Bear Stearns, Deutsche Bank, Goldman Sachs and asked them to create securities called collaterized debt obligations (CDOs) that Paulson Company could wager against. The banks would sell CDOs to clients that thought the assets would appreciate and Paulson bought CDS on the mortgage betting the assets would fall. Paulson could wager a $1 billion that the mortgage backed securities would fall. Paulson worked with the banks to short CDOs. The Hedge fund was the impetus for the CDO transaction being sold to the investor.

3. Paulson Company eventual had $5 billion of bet against CDOs. Months later Paulson had $4 billion in personal profits. One of the biggest loser was Deutsche bank.

4. By the middle of 2009, one in ten American were delinquent or in foreclosure. Housing prices had drop 30 to 40 percent from their 2006 peak price.

1. Milton Friedman influenced Central Banks to believe they could perpetuate the boom phase of the business cycle indefinitely

2. Greenspan added liquidity during a boom phase to ease quantitatively at the hint of market correction. This was a dangerous practice only to be used during the most severe economic crisis conditions. "Monetary easing should only be tolerated in times of real systematic financial distress in the economy." Massive liquidity injection by the central bank are hazardous because they create bubbles.

3. The fundamental law of liquidity is: liquidity used to manipulate excess debt as phantom equity will cause the liquidity to ignite into a firestorm.

4. Brenake and Greenspan have been seduced by easy money.

5. The Role of the CB is to moderate money supply, maintain steady and sustained growth, and moderate boom and bust cycles, according to Friedman.

6. Inflation can cause unemployment. Market capitalism is unlikely to deliver full employment. 100% employment is not possible.

7. Greenspan's massive liquidity has driven Monetarism into Bankruptcy.

8. The Fed has violated the basic rules of monetarism by creating false prosperity to fund debt manipulation and support income disparity as a source of capital formation amid weak consumer demand. The birth of Mortgage Backed Security and Consolidate Debt Obligations have push phantom capital into global economy seeking growth from manipulating debt collateralize by the price bubble.

9. A decade of excess money has produced over-capacity buffered by systematic under pricing of risk. The neoliberal finance capitalism brought the entire global system crashing down in 2006/2007.

10. The Greenspan Put has created several bubble economies with each bubble getting bigger to cover the previous debt. The Greenspan put works by lowering fed rates negative to inflation, letting a new bubble form, pumping liquidity into the system to avoid price correction. Debt and default cause the bursting of the bubble, as it did in the Housing Bubble in 2007.

11. In 2007, commercial paper seized caused from high debt and insufficient revenue. Over $150 trillion in derivatives were tied to LIBOR rates. US financial institution management told government officials that they would not be able to meet global obligations in Asia. The Fed responded by injecting liquidity but contraction was inevitable as US sales sagged causing huge financial writedowns from credit losses.

1. The biggest force pressuring yields to move upward is the trillions of dollars the Treasury has to sell to finance the 2009 budget.

2. Reserve assets, such as treasuries are accumulated in good times (yield downward) and sold in bad times (yield upward).

262 Billion = US monetary base as of September 2008 (minus dollars held abroad)

3,818 Billion = projected US monetary base in September 2009 (minus dollars held abroad)

2. Japan's government spending is very large. When the government needs to raise more money, it issues government bonds. A government bond is a loan to the government from the private sector.

More factions are clamoring for the BoJ central bank to sharply increase purchases of bonds and move interest rates to zero percent. Who are these factions? Government agencies and business that need credit.

BoJ controls interest rates in Japan. The purchase of government bonds drives down the yield down and the price up in the bond market.

BoJ uses the bonds as an asset and increases money that associated banks can loan. Banks have money to loan to consumers and business. A surge in cheap credit, in the short term increase Japan GDP beyond its 4.8 percent.

However, BoJ is defensive and conservative in spending and anticipates further financial intervention in the future. The high government deficit and increased government spending for the aged raise rise of default. Bond insurance premiums are raising to cover the risk.

3. Japan has had two quarters of expanding exports. The Yen has gained strength against the dollar and consumer prices have dropped.

4. There is not enough momentum to sustain economic growth of fixed investments and private consumption.

The Japanese government is subsidizing consumption by borrowing money from BoJ and increasing government spending too boost GDP numbers. The stimulus spending had little affect in the 1970s to remove recession. The Japanese government increased the size of the deficit and it took 20 years to pay off the debt and heal economically. History seems to be repeating itself.

Governments want central banks to buy bonds. Central banks control the amount of credit liquidity in the system but must balance financial exposure with risk of default. CB will loan money to healthy economies because default risk is lower. However, in depressed economies loaning money must be insured against default. Often CB are pressured politically to loan money to governments through bond purchases in economic downturns. CB respond to the political pressure but conservatively. Government with high deficits pay more in interest payments, must eventually increase taxes, as taxes increase less money is available for operation costs, large deficits devalue local currencies, exports increase and imports decreases assuming all economies are not depressed. Government spending increases GDP short term, taxes slow growth, decreasing operating capital and profits for innovation. Companies borrow money to expand and operate. If growth remains strong they pay off debt. However, if demand for their products and services decrease then they are not able to pay their debt payments and risk default.

http://www.pbs.org/wgbh/commandingheights/lo/countries/jp/jp_spend.html

Government spending responses slowly to Market signals.

http://kenyantykoon.wordpress.com/2009/11/05/what-you-need-to-know-about-government-bonds/

What you need to know about Government bonds

1. Government bonds are IOUs to the general public to borrow money they will return in a predetermined time.

2. Government's issues bonds when they have moneys that are not met by tax revenues.

3. Buying back Issues bonds at a certain date have a contract affect on the money supply and decrease inflation.

4. Government Bonds reflect what will happen to interest rates in the future. If yields are expected to rise, bonds will sale to capitalize on gains. If yields are expected to fall, bond will be bought, to capitalize on the future earning power of the bond.

How does the Fed shrink the Money Supply?

1. To shrink the base money supply, the fed sells assets, and takes the money out circulation from the sale.

2. Rising Isolationist sentiment states, the US foreign policy should go its own way on its own; the US should not worry about what other countries think of us.

3. Military expansion abroad is coming at a time when the country is less inclined to expand efforts aboard due to the depression. The Afghan policy is not popular. Wars cost money. Government debt is high, $12 trillion and expanding to $14 trillion. Government spending is not popular.

3. Isolationist sentiment grows when a country is battered economically.

4. Isolationist also encourages protectionism. Protectionism slow global growth and expansion. Free Trade becomes more restrictive and contracts in size. There is more support for free trade in a fat economy.

2. Interest rates are close to zero.

3. Citigroup has close to $1 trillion in US deposits. Goldman has a $16 billion bonus program.

2. The market is concerned about debt issues

3. Government Debt to GDP will be 227% by 2010 according to IMF projections.

4. The aging population is shifting from saving to consuming.

5. Japan government bonds JGB yield is 1.48%

6. The market fears JGB will fund more government spending amidst plunging tax receipts.

7. In 2010, $489 billion JGBs will be issued without a plan to reign in government spending.

2. A stronger yuan makes US imports more expensive and slows US consumption

3. The reducing in imports should reduce the trade deficit and restore balance.

4. As the yuan becomes stronger, I suspect that the US bond yields will start to climb to compete for foreign funds, inflation will decrease, and exports will rise.

5. A strong yuan will cause a Chinese real estate to begin selling and investors will seek profits by investing in this market.


Referenced by:
   Is the PBOC signalling rate flexibility?

2. Manufacturing capacity is at 63%

3. Exports are increasing but Imports are increasing fast creating a $32 billion trade gap

4. The Yuan has devalued 22% since 2002

2. Rising social security debt and weak revenue stream contribute to the rising government spending.

2. Demand for imports rose 5.8% or $9.3 billion, the most in 16 years. 3. As demand for imports increases the trade deficit gap will increase reducing Gross Domestic Production (GDP). The demand of exports is not expected to rise as fast as imports.

4. Imports send dollars abroad chasing foreign products.

1. Ben Bernake has provided huge reserves for banks.

2. Are banks holding the cash and this is one reason we have not seen hyperinflation?

3. Will the fed contract the money supply and mop up liquidity as the economy expands?

4. The US budget deficit is over $1.8 trillion

5. The Fed has monetarized 15% of is expenditures, still a far reach from 50% by the Weimer republic that caused hyperinflation.

6. Bank reserves have soared from $100 billion to over $1 trillion.

1. Hydrogen boron gas is transformed into a a plasma.

2. The plasma is pinched and twisted into a tiny, dense ball

3. As the magnetic field starts to decay positive ions flow one direction and negative ions the other direction.

4. An electron beam heats the plasma ball, igniting fusion reactions between the boron and hydrogen.

5. The energy in the ion beam can be converted directing into electricity.

6. Part of the energy powers the next pulse and remainder is output energy.

Edward Whitacre, chairman of the government’s auto task force has helped GM emerge from bankruptcy.

Whitacre is inspired by the challenge to turn GM around. The ambition of Whitacre is to make money and build cars people are eager to buy.

Board members include Edward Whiteacre, Kent Kresa, Philip Laskawy, Kathryn Marinello, Erroll Davis Jr. E. Neville Isell, and Frintz Henderson

General Motors will keep four brands: Chevrolet, Cadillac, Buick and GMC.

The New GM reduced debt from $176 billion to $48 billion, reduced employee count from 91,000 to 68,500, and dealer counts from 5,900 to 3,600.

GM emerges from bankruptcy will 20% less in market share.

High labor wages, expensive health benefits, and underfunded pensions still weight down on the New GM.

2. High denomination instruments were printed until 1969

3. If 1% of marketable securities are in bearer bonds then it would imply $13 trillion in marketable securities. However, in 2009, “Economic report of the president” listed total Marketable US treasury as $5.82 trillion. All outstanding treasury securities are listed as $10.66 trillion.

4. Did the treasury issue $500 million denominated instruments between 1955 and 1969.

5. $1 billion instruments were never issued.

6. US debt: China has $760 billion, Japan $680 billion, and Russia $140 billion

7. Japanese Finance Minister Kaoru Yosano expressed Japan's "absolutely unshakable” confidence in the credibility of the U.S. dollar.