IMF cuts global growth forecasts... S&P downgrades Italy... Michael Lewis on Germany... Holding gold and cash... The new 'banks'... Do we understand solar?...
The International Monetary Fund (IMF) warned of slowing growth for the entire world today... World growth, according to the IMF, will be 4% in both 2011 and 2012, down from more than 5% in 2010. The IMF downgraded growth forecasts for the U.S. from 2.5% to 1.5%. In addition to the U.S. debt problem, the IMF is increasingly worried about Europe…
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In the euro area, banks must be made stronger, not only to avoid deleveraging and maintain growth, but also, and more importantly, to reduce risks of vicious feedback loops between low growth, weak sovereigns, and weak banks. This requires additional capital buffers, from either private or public sources. |
And the European situation is still deteriorating daily. Late yesterday, Standard & Poor's downgraded Italy's credit rating from single-A-plus to single-A. And the agency maintained a negative outlook on the debt. On cue, the European Central Bank stepped into the market today to buy Italian bonds. (It's been buying Spanish and Italian debt for weeks.) The yield on 10-year Italian government debt dropped to 5.603% in early trading today, down from an earlier high of 5.67%. Despite the government intervention, credit default swaps on Italian government debts are at all-time highs.
There's simply no way Italy can finance its debts... It must refinance 192 billion euro this year, 168 billion euro next year, and another 100 billion euro in 2013. Italy is the world's third-largest sovereign borrower with public debt of 1.7 trillion euro. And it runs a 3.9% annual GDP deficit. While it's not as far gone as Greece, Italy's time is nigh... And the ECB will continue pumping cash to delay the problems. That's why we're still bullish on gold and silver (and hedging our portfolio with short sales)...
And we're not the only ones relying on precious metals. Best-selling author Michael Lewis, whose books include Liar's Poker, recently wrote an article about Germany's financial crisis for Vanity Fair. As usual, it's excellent. While the article is entertaining for reasons other than its economic commentary (you'll have to read the article to see what I mean)… don't overlook one important aspect. Lewis reports Germany is relying on its gold reserves to carry it through the crisis...
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If Greece defaults on its debt, the E.C.B. will not only lose a pile on its holdings of Greek bonds but must return the bonds to the European banks, and the European banks must fork over $450 billion in cash. The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. "We have 3,400 tons of gold," he said. "We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.") |
And this information comes from a central banker. (Central bankers normally view gold as an enemy... After all, the precious metal is a scorecard governments' monetary follies…)
While many of the banks we've heaped so much scorn on over the years (like Deutsche Bank, UBS, Bank of America, and Goldman Sachs) are struggling with bad debts and bad trades… the "black market" lending industry is doing big business right now.
Large pawn shop/payday-lending companies Cash America, EZ Corp., and First Cash Financial are all at or near 52-week highs. Asset-salvage specialist Liquidity Services is at a new high. These companies are soaring because federal regulations (including the Credit Card Act of 2009 and the Dodd-Frank act) restrict big banks' lending. Also, soaring gold prices are great for pawn shops.
"What really is driving things is banks, regulators and legislators have turned their backs on consumers," Henry J. Coffey Jr., an analyst with Sterne Agee, told a Barron's writer. "Everything they've done at the federal level has restricted credit for consumers."
We know many "informal" investment funds that have sprung up to make loans where bankers cannot. These funds are earning safe rates of interest in the 8%-12% area. Steve Sjuggerud covered this idea in his latest issue of True Wealth. He also named his top lending stock right now... one that is paying a 17% dividend right now. If you're not yet a True Wealth reader, you can learn more about joining up here.
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New 52-week highs (as of 9/19/11): V.F. Corp. (VFC), Westport Innovations (WPRT), EV Energy Partners (EVEP).
Now that's more like it… In today's mailbag, readers take issue with our grasp of science and politics. Taunt us at feedback@stansberryresearch.com.
"I agree with you that the current technology for capturing solar energy to electricity is not efficient. However, I disagree with your statement below that says that capturing solar energy is impossible thanks to the second law of thermodynamics. This is technically incorrect. Solar energy conversion to electricity does not violate the second law of thermodynamics.
"The existing technology being used for solar energy capture is not efficient due to the cost of producing such a system. The law being violated is the law of conservation of financial resources. It simply costs far more to produce the solar panels and solar systems than it does to recover these costs from the energy produced. From a technical standpoint it is possible to achieve success in solar energy production. But that day has not yet arrived. Bill Gates recently gave a nice interview on technology and discussed alternative energy technologies. Give it a read.
"A technological breakthrough may someday make solar energy much more efficient and ultimately profitable and financially worthwhile. However, our government and the environmentalists are forcing dollars into infrastructure and building out solar installations while the funding would be much better spent on trying to find the breakthrough via R&D to make it profitable. We are squandering money installing solar and funding companies like Solyndara rather than spending on R&D to solve the problem. Typical government – spend money on symptoms rather than on a cure. I am confident that someday we will produce an efficient and profitable solar energy solution. It is a long ways off." – Paid-up subscriber Kerry Van Iseghem
Porter comment: With all due respect to your background, I'd suggest that your understanding of the Second Law is incomplete.
You say: "It simply costs far more to produce the solar panels and solar systems than it does to recover these costs from the energy produced."
And I would argue… So must it be, for economics captures most of the true energy that's going into the system.
"I have considerable respect for your evaluations of the current financial disasters going on around the world but I think your political commentaries are absolutely useless, unproductive, and BS. Where were you when G.W. Bush was selling the U.S. to all the large corporate donors (Think Haliburton, Drug Companies, etc) and setting us up for the financial disaster that Obama inherited on Day 1?" – Paid-up subscriber Paul Leap
Porter comment: We were explaining that…
1. Steel tariffs wouldn't help our economy. (Bush idea, 2003)
2. The Iraq war was unnecessary and wasteful and would boil over into a civil war.
3. That torture was a stain on our national honor and a high crime.
4. That Bush was, most likely, the worst president in the history of the U.S.
Where were you?
Regards,
Sean Goldsmith
Baltimore, Maryland
September 20, 2011