Investments and Beyond

Building Wealth

2015-06-21T10:36:00.001-07:00

SCIENTIFIC APPROACH

Building wealth is a process, more like erecting a building. It builds gradually. If we take a scientific approach, we should take out the strokes of luck and chances, though they have some role in building one's fortune. Instead, take it as a systematic process.

The hardcore trait of creating wealth is: Wealth Builders are Aggressive Savers. Rain or shine, a professional wealth builder (who manages and builds his wealth professionally!) must put aside some of his money into savings. THIS IS THE REAL CATCH!

The best way to save is regular savings, like monthly PAC (pre-authorized chequing), where a pre-set amount of money is taken out of your bank account, and put into any type of investment. In this way, we make sure that we keep on saving!

FUNCTION OF TIME

An intelligent person knows that, any growth is function of time, be it money or skill or knowledge. The more time is spent on something, the more growth opportunity is created.

WEALTH = f (TIME)

EXAMPLE:

I give you a stupid simple example. Let's say, you put your money in a bank savings account, which gives you 12% interest per year. Now, you put $100 of your money into this savings account.

If you put your money in January 1 and withdraw it in December 31:

total earning: $100 * 12% = $12

Instead, if you put your money in December 1 and shortly withdraw it in December 31:

total earning: $100 * 12%* 1/12 = $1

This simple example illustrates that, the more time your money is invested, the more growth is there, other things kept constant (like alternative growth opportunity, risk, inflation, tax).

VISION OF RICH

The serious wealth builder has a vision. He sees himself RICH! The more specific and determined that vision is, the more power there is. Instead of focusing on spending, he focuses more on saving and creating assets. As wealth is function of time, over long run, this systematic effort reaps the harvest of wealth.

Age of the Clouds

2014-02-02T21:44:00.000-08:00

NEXT INTERNET BOOM

Within the next four years, size of the internet is expected to quadruple in size.

The last time web traffic volume was expanding this fast, Microsoft shares went up from $3.7 to $58.4, establishing a gain of 1500% in five years. Same time frame, CISCO Systems saw gains as high as 3900%.

So, what’s the catch?

By 2016, annual IP traffic is predicted to reach 1.3 zettabytes [just consider: there are one trillion (yes trillion) gigabytes in one zettabyte].

There are several reasons for this surge:

More Devices: Mobile phones, tablets and other gadgets will continue to penetrate into people’s hands. By 2016, there will be 2.5 connections for every person on earth.

More Wi-Fi: More than 50% of Internet Traffic is expected to be connected through Wi-Fi during the time.

Faster Speeds: Faster travel means higher rates of traffic. Average broadband speeds will more than triple within next four years.

Increased Video: Video obviously uses more data. By 2016, two years worth of video will move through the Internet every second.

CLOUD COMPUTING

As Internet traffic and acceptance of cloud security increase, so will the cloud industry as a whole. Gartner, a leading technology research company predicts the cloud market to grow by 19% to $131 billion in 2013. The market will see major gains within this sector.

Analytics Company Comscore found that before adopting cloud services, 45% of small to medium-sized companies express security concerns. However, after adopting the cloud, 94% actually feel more secure.

So, what is cloud computing?

It refers to online service that provides applications and document storage remotely, instead of on the user’s hard drive. In general, hosting computers (servers) and subscribers (clients) are the main components of cloud computing- just as they are in a traditional client-server network.

So, what distinguishes cloud computing from a traditional client/server network? There are three major differences:

In cloud computing, the delivery of the services from the provider to a subscriber must be over the internet.

The services provided over the cloud by a provider are scalable; they can be increased or decreased as the need s of an individual subscriber or company change. Services are typically offered and billed by the minute or hours.

The services provided are managed completely by the cloud provider, the owner or manager of the host. The client or subscriber of the service does not have to worry about having a specific computer or operating system, or a certain processor or amount of RAM, and does not need to purchase software upgrades or download service patches. The subscribed services are not on the individual’s computer or system. They are on the provider’s hosts and are maintained by that provider and simply accessed by the subscriber.

COMPUTER POWER!

As per Moore’s Law (co-founder of Intel), computer power doubles in every 18 months! As a consequence, as internet is becoming more and stronger with dizzying speed, the new revolution in internet-based computer usage is coming to the fore. The pioneers in cloud computing like Cisco (NASDAQ:CSCO) or Palo Alto (NYSE:PANW), are set to shoot in their value.

End of a City

2013-10-07T10:34:00.000-07:00

The Scenario

The City of Detroit in Michigan has declared Chapter 9 bankruptcy on 18 July this year (Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities that assists them in the restructuring of debts). America’s 18^th largest city- Motor City, Mocity has gone flat broke. It is now the largest American city to ever file for bankruptcy protection.

Gripped by $17 billion of piled up debt, the city can no longer sustain itself. Detroit’s population has declined from a peak of 1.8 million in 1950, and recently the New York Times called the city as “home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.”

The Crisis

“Can we help Detroit? We don’t know.”

--- U.S. Vice President Joe Biden

Apart from the piling debt burden, the city owes $9 billion in unfunded retiree benefits.

The city’s lawyer is seeking to have the judge invalidate its pension contracts- so they can deny the pensions they promised to tens of thousands of workers.

As part of the bankruptcy petition, the city may be legally permitted to default on the promised pensions from those unlucky retirees in a futile attempt to “revive” the city. If those retires are lucky, they may get ten cents on the dollar. Even if the judge says it’s illegal for the city to confiscate the promised pensions- who has the better clouts?

For 60 years, Detroit has survived by the skin in the midst of serious mismanagement while spending non-existing money (i.e. paper borrowing on trust) in all the wrong places.

Now it can bear no more. Bailing out Chrysler and GM with taxpayer money (during 2008 recessionary bailouts) was apparently a politically attractive move. Bailing out the city is a different story. Which was echoed by the U.S. Vice President’s statement.

More Detroits to come

The problem is not quite unique to Detroit. Listen to what is said by Michigan State Economist Eric Scorsone:

“ …Detroit is not unique. It’s the same in Chicago and New York and San Diego and San Jose. It’s a lot major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems.”

The credit based economy, with unlimited paper and debt creation power, is wobbling on its own hills. The same scenario is emerging everywhere. From Detroit to Greece.

Chaos at the Glacial Pace

The problems are fomenting slowly. Like a glacier which is moving slowly without making any sign of great fall, problems are piling. Even the Pope- is saying the path we’re on isn’t sustainable. His visit to Brazil came at a time when thousands of people were rioting because of the government’s failure to provide basic necessities while spending billions to host the World Cup. Taking the side of the protesters, Pope Francis notes that globally “we risk having a generation that hasn’t held a job. Personal dignity comes from working, from earning your bread.”

This may look extraneous that the city government of Detroit is seeking to deny its pension obligations, but is it really? If the trust is broken from the top level, what might happen next? The recent drama that is going on in Washington D.C. over possible U.S. debt default and government shut-down, who knows what happens.

Alternative Exposure to Real Estate

2013-05-06T20:39:00.001-07:00

NEW IDEA IN REAL ESTATE

The new idea in Real Estate investment is the REIT, which stands for Real Estate Investment Trust. It is basically indirect exposure to the Real Estate sector.

Major features are:

Its an Investment Fund, just like a mutual fund, legally set up as a trust.
The fund builds, buys and repossess properties and manage them.
Income comes from rental income, capital gain and other investments.
By law, REITs must distribute100% of its taxable income for a taxation year so that it does not incur tax.

Owning a REIT gives the benefits of being a landlord without having to face the hassle of actively managing the property.

REITs are governed by many regulations, the most important being that they must distribute all/most of their taxable income to unitholders/shareholders each year as distributions. That’s why they’re so popular with investors seeking steady income.

Other important regulations include:

Asset requirements: at least 75% of assets must be real estate, cash, and government securities.

Income requirements: at least 75% of gross income must come from rents, interest from mortgages, or other real estate investments.

Stock ownership requirements: shares in the REIT must be held by a minimum of 100 shareholders.

REITs specialize by property type. They invest in most major property types with nearly two-thirds of investment being in offices, apartments, shopping centers, regional malls, industrial facilities, and even fast-food chains.

BENEFITS OF REITS

High Yields. For many investors, the main attraction of REITs is their dividend yield. The average long-term (15-year) dividend yield for REITs is about 8% — well more than the yield of the S&P 500 Index. Also, REIT dividends are secured by stable rents from long-term leases, and many REIT managers employ conservative leverage on the balance sheet.

Simple Tax Treatment. Unlike most partnerships, tax issues for REIT investors are fairly straightforward. Each year, REITs send Form T3 to their shareholders (in case of non-registered accounts), containing a breakdown of the dividend distributions. For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital. As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend.

The portion of the dividend taxed as capital gains arises if the REIT sells assets. Return of capital — or net distributions in excess of the REIT's earnings and profits — are not taxed as ordinary income, but instead applied to reduce the shareholder's cost basis in the stock. When the shares are eventually sold, the difference between the share price and reduced tax basis is taxed as a capital gain.

Liquidity of REIT Shares. One can buy and sell REIT shares easily bought on a stock exchange. By contrast, buying and selling property directly involves higher expenses and requires a great deal of effort.

Diversification.Studies have shown that adding REITs to a diversified investment portfolio increases returns and reduces risk since REITs have little correlation with the S&P 500.

PERFORMANCE

The S&P/TSX Capped REIT Index is up 19 per cent on a cumulative basis over the past three years, roughly three times more than the broader market.

The S&P/TSX Capped REIT Index is a subset of the broad-based S&P/TSX Income Trust Index. It is a sector-based index comprised of Real Estate Income Trusts which are classified in the Financials sector of the Global Industry Classification Standard (GICS®). Individual constituent REITs’ relative weights are capped at 25%. The Toronto Stock Exchange (TSX) serves as the distributor of both real-time and historical data for this index.

Performance Data

INDEX NAME	PERFORMANCE (AS ON 30-SEP-2022) *
	3 YEAR	Inception (Oct 17-2002)
S & P/TSX CAPPED REIT INDEX	4.27%	8.77%

· Source: Blackrock.com

A FURTHER LOOK AT THE FEATURES

REITs have been largely immune from market chatter, which is appropriate because they’re positioned to thrive in today’s low-rate, low-growth world.

REITs hold portfolios of malls, industrial properties, offices, apartments, hotels or retirement homes.

They typically pay out quarterly income to investors, with a significant portion coming from a return of capital.
Income received as a return of capital isn’t taxed in the year it’s received, but it does reduce the adjusted cost base for an investment. This, in turn, may give the investor a larger capital gain when he sells.
REITs as being somewhere between average and peak valuation levels, which means the opportunity for serious price appreciation has passed.
Even after a small recent pullback, the REIT index has gained 16 per cent in the past 12 months.
What’s left is an opportunity to generate income yielding about 5 per cent and additional share price gains of 4 to 6 per cent based on strong fundamentals for commercial real estate.
There are key differences between that segment and residential real estate, which appears to have peaked in Canada.
Residential Real Estate market has uncertain growth prospects.
By comparison, commercial real estate is in good shape. Even with the economy growing slowly, REITs have been able to consistently increase their cash flow.
Acquisitions, new developments and redevelopments of existing properties have helped boost cash flow, as have rising occupancy rates and rents.
Shopping mall REITs are benefiting from the arrival of U.S. retailers such as Target and Nordstrom.
Industrial REITs are recovering from a hit to their tenants caused by the rising Canadian dollar (which makes our exports less competitive).
Office REITs are doing well because of a limited supply of office space.

FINAL COUNT

REITs are consistent cash flow earners.
Commercial REITs are front runners.
With arrivals of giant retailers like Wal-mart, Targets and Nordstrom in Canada and also through expanding consumer base, commercial REITs create a solid cash flow machine
On average 5 percent dividends are earned, on top of that, 4 to 6 percent capital gain can be earned.

The Silver Boom

2013-03-15T11:16:00.000-07:00

The world is dangerously running out of silver.

Silver is there in most of our useful devices than any other commodity besides petroleum. Over HALF of silver is used in industrial applications. It is used in just any of the electronic devices made-from TVs to computers to electric cameras to iPads. It is also essential for batteries, disinfectants, solar energy, CDs, solar energy and water purification.

The list of products that need silver is enormous and constantly growing- including the two biggest areas of all:

· Photovoltaic cells used in smartphones (1.2 billion cellphones were sold last year i.e. 2012!)

· Its recent leading role as antibacterial agent being used by hospitals and health care facilities around the world.

A report from Thompson Reuters shows, industrial demand for silver could hit a record 511 million ounces by 2014.

On the other hand, the SUPPLY of silver is in downward of historic magnitude. Silver inventories have fallen 92% since the start of 20^th century. Just think about it…..90% of the gold ever mined has been saved, but 90% of all the silver ever mined has been used up for industrial purposes.

As we mentioned in our previous discussion on silver, silver is severely underpriced. Wheres the availability of silver in relation to gold is only 3X, the price of gold in relation to silver is 55X (historically, gold silver price has been 16X). So, no doubt silver is set to skyrocket. Simply, there is no other alternative. If we look at the price trend of gold and silver, we find that:

In last ten years, silver has returned 609%, while gold has returned 439%.

But still, it is underpriced. And as the data above shows, it has no way but to rise sharply. It has to more than TRIPLE in price (from current ratio of 1:55 to historical ratio of 1:16).

The critical part is this- As people learn of the growing silver shortage, demand rises even more sharply. John Embry, Chief Investment Strategist of Sprott Asset Management of Toronto, says: “When silver breaks free, I think many people are going to be shocked by how fast and far it goes.”

Multimillionaire and Investments guru Jim Rogers says: “If you put a gun on my head and said you had to buy one, I would buy silver rather than gold.”

So, folks, prepare to take roller coaster ride on silver!

The Magic of Money Creation!

2013-02-25T09:33:00.000-08:00

MODERN MONETARY SYSTEM

The money supply is made up of two components: cash and credit. But the amount of credit is much larger than the amount of cash.

This is the real magic of money creation! This is where the modern (and also magical!) monetary system comes into play.

The Central Bank controls-either directly or indirectly-total supply of money in the economy. The money that the Central Bank prints is only a small portion of total money circulating in the economy at any point in time. The bulk of the money supply consists of deposits that the public holds at financial instituions-i.e in their bank accounts.

Bank deposits are LIBILITIES for the bank. Banks act as FINANCIAL INTERMEDIARIES, by making these surplus funds from savers/suppliers available to users/demanders of fund. By law, banks are allowed to loan out a major part of these deposits to creditors. This process is known as CREDIT CREATION.

It is this credit creation process that constitutes bulk of the money supply.

CREDIT CREATION: USE OF FRACTIONAL RESERVE BANKING

The process of credit creation is done by FRACTIONAL RESERVE BANKING. What it means simply is that, banks can create credit or loan against the amount deposited in their bank, by keeping a fraction of the deposit as RESERVE with the Central Bank, and lending out the remaining amount. The additional amount that is created through loans, then becomes part of money supply (reserve amount with central bank is NOT part of money supply). This amount lent then become additional loanable fund (after keeping a part of it as reserve) and so on. So, initial money supply keeps growing through the process of CREDIT CREATION and multiplying the money supply in the economy.

This is the root of expansion of money supply by multiple times from the initial money created and circulated by the Central Bank, which is done through the mechanism called the fractional reserve banking.

A SIMPLE EXAMPLE

Let’s assume Bank A has received a deposit of $100. By the use of Fractional Reserve Banking, it can create credit by keeping 10% of its deposit, i.e. $10 as Reserve with the Central Bank, and lending out the remaining $90 to others.

Individual Bank	Amount deposited ($)	Reserves	Lent Out
A	100	10	90
B	90	9	81
C	81	8.1	72.9

The amount of $90 lent to individuals is then deposited in Bank B. It lends out $81, after keeping fractional reserve of $9. This amount becomes circulated and available in the economy. Eventually this amount then is deposited in Bank C, which again creates credit of $72.9.

This money creation process goes on, although initially it was only $100 that was created. But there is a limit of how much money can grow in the economy from the initial cash money. This is calculated by using the MONEY MULTIPLIER.

MONEY MULTIPLIER:

Money Multiplier is calculated by using the reserve requirement. It stipulates how many times a certain amount of money can grow within the economy.

The money multiplier, m, is the inverse of the reserve requirement, R

m = 1

Example

For example, with the reserve ratio of 10 percent, this reserve ratio, R, can also be expressed as a fraction:

R = 1/10

So then the money multiplier, m, will be calculated as:

m = _1_

1/10

= 10

So, the initial money supply can grow by 10 times, that is, upto $1,000.

It is clear then, that most of the money supply in the economy occurs through the creation of credit.

WHAT’S THE BIG DEAL ABOUT FRACTIONAL RESERVE BANKING?

Fractional Reserve Banking is by definition expansionary, i.e. it is bound to produce inflation in the economy. Since this money creation is not backed by any tangible resource/asset, but by the dictum of the central bank, it can keep expanding indefinitely. By simply tweaking the reserve requirement (i.e percentage of R in the above example), the central bank can determine how much money it can grow. It breed a highly rich moneyed class of people, those who have control and access to this money! So traditionally, the bankers by default control the money, and in reality, they have the real power in the society. The savers, get only a fraction of return from this money circulation cycle (through a tiny percentage of interest income), whereas the users/borrowers take out this money, grows it in business/venture (through return on investment) and exploit the real power of money! So, this is the borrowers who make money from other peoples’ money! Those who understand this magic, they get rich.

What is in Gold-Silver Ratio?

2013-01-29T15:03:00.000-08:00

There are interesting digressions going on in silver and gold plays, which reveal a sizzling opportunity as far as investing is concerned. Historically, price of gold and silver has been 16:1, based on the assumption that the availability of silver on earth is 16 times more than gold, or availability of gold is 1/16th times that of silver. So, theoretically the price of gold to silver should not rise beyond 16:1.

The Ground Reality

1. Annual mining of gold is 80 million ounce, versus 750 million ounce for silver. Annual recycled amount is 50 million oz. and 250 mill. oz. for gold and silver. So, in total, market availability is 130 million oz. for gold and 1,000 million oz. for silver. This gives us current availability ratio of 8:1 for silver and gold.

2. Not all gold and silver are available for investment purposes, due to their various use in industrial applications. For investments (jewellery, bars and coins), the annual availability of gold and silver is roughly 120 million oz. versus 350 million oz. So, real availability ratio of silver and gold is 3:1.

2. In reality, investors are allocating their investments between gold and silver in totally different way. Actual Sales of silver in 2012 was 33,742 million oz., versus 744 million oz. for gold. This gives us a sales ratio of 45:1 for silver to gold.

3. Whereas, availability ratio for silver to gold is 3:1, sales ratio is 45:1 in physical value and 55:1 in dollar value. So, investors choose to buy silver at a ratio that is well above what is available.

	GOLD	SILVER	RATIO
Annual Mining (mill. oz)	80	750
Recycled (mill. oz.)	50	250
Total Availability per year (mill. oz.)	130	1,000	8X
Available for Investing (mill. oz.)	120	350	3X
U.S. Mint Actual Sales in 2012 (mill. oz.), partial data	744	33,742	45X
Investments Value (Billion $)	9,000	150	60X
Market Price (in USD) on Dec.28,2012	$1,656.30	$30.00	55X

Source: World Gold Council (http://www.gold.org/) , U.S. Geological Survey (http://www.usgs.gov/) and Silver Institute (http://www.silverinstitute.org). Market Prices taken from (http://www.cmi-gold-silver.com/gold-silver-daily-spot-prices/).

How Prices are determined?

The silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. This is against the daily average mine production of about 2 million ounces! So, no surprise that the price of silver is such severely manipulated!

The investment market for silver is smaller. While the dollar value of gold in the world approaches $9 trillion, the value of investable silver is estimated at around $150 billion. This is a ratio of 60:1 in dollar terms.

Where is the Market Moving Ahead?

Like we said, historically price ratio of gold and silver is 16:1, Today this ratio is 55:1. So, what are these numbers telling us? In all likelihood this price level cannot be sustainable, silver being such severely underpriced. Those who are smart investors and follow the market, they will be rewarded. Expect a super bull market for silver ahead.

BASEL III: The Game Changer

2012-12-24T11:26:00.001-08:00

WHAT IS IN BASEL III?

A silent transformation is about to take place. The price of gold might be permanently affected due to the proposed changes, spearheaded by BIS (Bank of International Settlements), an exclusive group of Central Bank Governors, governed by 58 influential member nations.

Present day banking throughout the world is governed by the guidelines set forth by the BASEL Committee on Banking (of BIS) in the form of BASEL regulations (named after the city of Basel, Switzerland, where this group meets and where the headquarters is). The new BASEL III, proposed to include some radical changes, will change the financial landscape of gold market fundamentally.

ABOUT BASEL

Banks are required to keep provision of capital against their assets, sketched as Risk Weighted Assets. So, the assets have been categorized, according to their risks. The more risky an asset class is, the more provision. First introduced in 1988 to provide a set of minimum capital requirements for banks, known as BASEL I, it was meant to regulate banking industry with a set standard worldwide, as part of New World Economic Order. Since then, BASEL has been considered as global standard for banks on capital adequacy, stress testing and market liquidity risk. A more comprehensive set of guidelines, known as BASEL II, were initiated in 2004. The proposed new changes, coined as BASEL III, are the offshot of financial crisis the world has experienced since 2008.

Tier I capital (core capital) consists, among others, of treasury securities and mortgage backed securities. Gold used to be considered as tier III capital. Not only that, only 50% of value of gold would be considered, to be included in the capital.

The reality during the last few years have proven to be otherwise. The present monetary system has infected the value of these paper assets of tier I capital from inside, leaving their true value minimal. So banks have realized that whatever has been labelled as real, is not so. So, they have been compelled to recognize what the true value is.

Accordingly, the status of gold has been "elevated", so much so that it will now be part of tier I capital. Not only that, previously banks were required to keep 4% of tier I capital against their risk-weighted assets. Under proposed rule, the requirement would be 6% of tier I capital. The result, obviously is a rise in demand for elements consisting tier I. That means, banks would require not only replace a portion of their paper assets with bullions, but may use it to meet 2% extra need as well. A very bullish sign indeed.

THE NEW GOLD STANDARD

Starting January 1, 2013 when BASEL III becomes effective, it will usher in a new era for gold market. So, officially from then on, Gold Is Money. Already banks and central banks throughout the world have begun to stockpile their reserve for gold, as a result of its full status as a financial asset. In fact, the World Gold Council revealed that net central bank purchases in 2011 exceeded 455 tonnes, the largest purchase since 1965. And it reported banks will purchase 700 tonnes of gold for this year alone.

So, in this process of re-monetization of gold, much events are awaiting to be seen in the forthcoming months.

The Future of Riches

2012-11-21T14:46:00.000-08:00

New Economic Reality

The economic trend of the globe is moving towards the East, according to a recent report. By 2050, the global economic centre of gravity is poised to be in Asia, where top 4 countries out of 5 in terms of per capita income will be. The report predicts that within 40 years, Asia will boast more wealthier residents than any other continents.

Fastest Growing economies

Compiled by Citibank and a property consultancy named Knight Frank, it’s a lengthy analysis styled "The Wealth Report 2012," based partly on interviews with the super rich (people with more than $25 million in investable assets). The most interesting part of the study is that, it predicts that Singapore-the tiny Southeast Asian city-state will be the world’s richest nation by 2050, with an estimated per capita income of $137,710.By that they mean its per capita GDP at purchasing power parity (that is, it attempts to more accurately measure the average income by considering inflation, cost of living and exchange rates).

More interestingly, the report predicts that India, Bangladesh, Vietnam, the Philippines, Mongolia and Sri Lanka all make the fast-growing list. Of the top 10 fastest rising economies- all but three are in the region (Table-2). By contrast, the western European countries as well as Japan will be the worst performing ones.

Shifting Centre of Gravity

LSE professor Danny Quah forecasts that by 2050 the world’s economic centre of gravity- a theoretical measure of the focal point of global economic activity based on GDP, will have shifted eastwards to lie somewhere between China and India. In 1980 it was in the middle of the Atlantic.

Apart from those who inherit wealth, most of the millionaires are business owners. To be able to amass such huge amounts of wealth, means there must be an alignment between opportunity and ability present in these economies. The sectors where most wealth are generated from are- natural resources, manufacturing and construction. Citi forecasts that the North American and Western European share of world real GDP will fall from 41% in 2010 to just 18% in 2050. Developing Asia’s share is expected to rise from 27% to 49% in 2050.

China will overtake the U.S. to become the world’s largest economy by 2020, which in turn will be overtaken by India in 2050. Russia or Brazil (part of so-called BRIC) do not make it on to Citi’s list of Global Growth Generators (“ 3G” countries). Instead Citi includes countries such as Bangladesh, Egypt, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam on this list.

While these countries can expect rapid economic growth, much of the wealth already held in developed economies will be maintained, according to Citi.

Measuring a country’s affluence in terms of GDP per capita shows that Singapore currently tops the chart. By 2050, Singapore is expected still to be in the top spot, with Hong Kong and Taiwan moving up to take the second and third places. But the U.S., Canada, UK, Switzerland and Austria will all still be in the top 10, although the U.S. will have dropped down to fifth place in the overall rankings (table-3 ). And the U.S. is the only non-Asian nation to make it through top 5.

Canada, Switzerland and Austria will be able to maintain their berth into the top 10 list upto that time (2050). But old world economies will have the worst growth performance in the next 40 years, the report predicts. Spain, France, Italy and Germany are at the bottom of this list. But, Japan and its aging population will have the weakest projected growth of all economies, Knight Frank estimates.

Most of the countries coined as 3G are currently known as “emerging markets”. But this term is used to tag those countries that are considered likely to thrive in the globally integrated economy.

Table 1: THE WORLD’S LARGEST ECONOMIES

2010	Countries	GDP $tn	2050	Countries	GDP $tn
1	US	14.12	1	India	85.97
2	China	9.98	2	China	80.02
3	Japan	4.33	3	US	39.07
4	India	3.92	4	Indonesia	13.93
5	Germany	2.91	5	Brazil	11.58
6	Russia	2.20	6	Nigeria	9.51
7	Brazil	2.16	7	Russia	7.77
8	UK	2.16	8	Mexico	6.57
9	France	2.12	9	Japan	6.48
10	Italy	1.75	10	Egypt	6.02

· GDP by purchasing power parity (PPP)

· Source: Global Growth Watchers, Citi Investment Research and Analysis, 2011

Table 2: ECONOMIC GROWTH (3G) 2010-2050

	TOP 10	%	BOTTOM 10	%
1	Nigeria	8.5	Spain	2.0
2	India	8.0	France	2.0
3	Iraq	7.7	Sweden	1.9
4	Bangladesh	7.5	Belgium	1.9
5	Vietnam	7.5	Switzerland	1.9
6	Philippines	7.3	Austria	1.8
7	Mongolia	6.9	Netherlands	1.7
8	Indonesia	6.8	Italy	1.7
9	Sri Lanka	6.6	Germany	1.6
10	Egypt	6.4	Japan	1.0

· GDP change year on year

Table 3: GDP PER CAPITA

2010	Countries	$US	2050	Countries	$US
1	Singapore	56,532	1	Singapore	137,710
2	Norway	51,226	2	Hong Kong	116,639
3	US	45,511	3	Taiwan	114,093
4	Hong Kong	45,301	4	South Korea	107,752
5	Switzerland	42,470	5	US	100,802
6	Netherlands	40,736	6	Saudi Arabia	98,311
7	Australia	40,525	7	Canada	96,375
8	Austria	39,073	8	UK	91,130
9	Canada	38,640	9	Switzerland	90,956
10	Sweden	36,438	10	Austria	90,158

· 2010 PPP US $

The report notes that tough economic times over the past few years have not affected the rise of centa-millionaires, people with more than $100 million in assets. Today there are 63,000, up 29 percent since 2006. However, rapidly rising GDP does not tell us much about the distribution of wealth. Many of the richest countries in the world today – Qatar, for example- have tremendous wealth gaps. “The distribution of that wealth will be dictated by political factors as much as the economic process itself,” noted Willem Buiter, Citi’s Chief Economist, in the report.

The Future?

CNN notes that some of the West’s super-rich are already crossing the Pacific, in anticipation of the “new Asian Century”. Facebook co-founder Eduardo Saverin, moved to Singapore in 2009 and renounced his US citizenship. Jim Rogers, the co-founder of the Quantum Fund with George Soros, did the same and is now teaching his daughters Mandarin. “I’m preparing them for the 21^st century by knowing Asia and by speaking perfect Mandarin”, he told CNN. “It’s easier to get rich in Asia than it is in America now. The wind is in your face. (The US) is the largest debtor nation in the history of the world,” Rogers added.

The report warns that the dissatisfaction with income inequality shown in the Occupy Wall Street demonstrations “will gain momentum, and that there could be a long-term recalibration between governments, businesses and society as a result.” No doubt, there could be phenomenal shake-up in global economic and political landscape during these times ahead, with massive scopes of wealth re-distribution. The ones who are well-informed and keen will definitely reap the benefits.

O Canada!

2012-08-15T22:45:00.000-07:00

Canada has Resources

When someone considers Canada, the first things that pop up in the mind are- maple leaf, harsh winter, and….natural resources!

Canada has natural resources like Saudi Arabia has oil and South Africa has diamond. Its no surprise that Canadian economy is largely resource based. With 1.7 trillion barrels of oil and plenty of gold and timber, Canada’s resource sector is the backbone of its triple-A rated economy.

Not only extracting and utilizing these resources from Mother Nature, the Canadians have taken this resource expertise to global level. They haven’t been content to stay home and ply their trades domestically. They are more adventurous than that. “Canadian know-how” has left few areas of the earth unexplored. Presently Canadian mining companies operate in 350 off-shore mines in different parts of the globe. They search for silver in Mexico and South America, gold in China, platinum in South Africa, diamonds in Namibia, oil in Indonesia, Iron from Sweden…well you get the picture.

Abundance above and beneath the Earth

Natural Resources- categorized as forests, minerals and metals, energy- form the backbone of the economy. These sectors have been engine of economic growth and job creation for generations. In 2009 alone, the sectors generated 11 percent, or $133 billion, of Canada’s GDP and directly employed 759,000 people.

Canada’s considerable natural resources are spread across its varied regions. In British Columbia the forestry industry is of great importance, while oil and gas industry is important in Alberta and Northern Ontario is home to a wide array of mines. Canada is a world leader in the production of many natural resources such as gold, nickel, uranium, diamond and lead. It also is endowed with mineral resources of coal, copper and iron ore. Several of Canada’s largest companies are based in natural resource industries, such as EnCana (TSX: ECA), Cameco (TSX:CCO), Goldcorp (TSX: G) and Barrick Gold (TSX: ABX).

Gold

Canada is the 8^th largest gold producer in the world. As per 2011 estimate, 101 MT or 3.6% of global production was made in Canada.

The west of township of Timmins, located in the famous Abitibi Greenstone belt in Ontario-Quebec border is the major center of gold play. So far, 180 million ounce of gold have been found and 70 million ounce have been mined. Another prospecful area is the Yukon Territory. Since the famous Klondike Gold Rush in 1897, a new episode of New Yukon Gold Rush is taking place. It’s mainly happening due to the placer gold, washed by water and gravity, originating from a distant source. It is estimated that the amount of placer gold would be around 160 to 180 million ounce range.

Minerals

Many minerals are found within ancient rocks of the Canadian Shield, which is located in Central and Eastern Canada. Canada leads the world in the production of uranium, which is the fuel for nuclear power stations. Modern energy-hungry world will be hell-bent to get access to this precious radioactive metal. Canada is also the leading producer of potash- used for making fertilizers- with 33 percent of world’s supply (in 2005).

Fossil Fuel Resources

A new source of oil- oil sands- is being exploited in places such as Fort McMurray in northern Alberta. This is a mixture of thick oil and sand that is dug up and heated, releasing the oil which is then piped off. Known as Athabasca oil sands, this vast reservoir in Alberta give Canada the world’s third largest reserves of oil after Saudi Arabia and Venezuela, according to USGS.

Canada currently ranks as the world’s sixth largest producer of crude oil after Saudi Arabia, Russia, U.S., China and Iran, according to U.S. Energy Information Administration. Resurging growth in Western Canadian oil production and new oil sands investments drive the positive outlook. Canadian oil production is poised to more than double to 6.2 million barrels per day by 2030, which will put Canada in the top three to four oil producers in the world.

Global Center for Resource Financing

Toronto, Canada’s largest city and commercial center, is generally viewed as the mining finance capital of the world. Toronto is home to the Toronto Stock Exchange (TSX), to more than 400 mining and exploration company offices, over 30 mining company head offices and several hundred mining suppliers, consulting firms and service providers. The TSX is the global destination for financing international projects. During the last five years, 32 percent of global mining capital and 82 percent of financing transactions were handled through the TSX.

Future of Resource Based Economy

Countries with treasure troves of natural resources ordinarily experience currency appreciation during commodity bull markets. It is evident from the U.S. dollar and the loonie (Canadian currency) being in parity right now. And considering the commodity super cycle we are currently in, we suggest the bull market in Canadian dollars still has many years to run. The stocks in TSX and TSX-Venture also have yielded explosive gains during these times. Especially the junior mining stocks have been showing valuable returns.

The Miracle Material

2012-05-17T10:00:00.000-07:00

Some key materials have played central roles in the development of human civilization. The discovery of copper and spread of metallurgy heralded the “Bronze Age”. Then came the “Iron Age”, corresponding later to the “Steel Age”. The industrial revolution brought us the “Oil Age”. The later part of 20^th century saw the contribution of “Silicon Age”, brought about by discovery of microprocessor and changing the face of electronics.

Now, the first decade of 21^st century can be characterized by this “Miracle Material”. It is one material that would arguably change the face of technology forever. It is called “Graphene”, which is an allotrope (the atoms of an element bonding together in a different manner) of carbon (just like graphite is an allotrope of carbon, as well as diamond being an allotrope of carbon).

Discovery of Miracle Material

Graphene was first separated from flakes of graphite. It is made of single sheet of carbon one atom thick. So, this is ONE ATOM THICK, making it the thinnest material ever discovered. It turned out to be the strongest, most elastic and most conductive material on earth. It was such a major breakthrough that, the two researchers were awarded the Nobel Prize in Physics in 2010, just six years after its discovery. It turns out that, this material is 50,000X thinner than a human hair, 230X more powerful than silicon and 200X stronger than steel! And also, it is the most elastic substance on the planet. You can bend, twist or fold it into any shape you like.

No Intrinsic Limits

In February 2010, IBM announced that it had created the world’s tiniest transistor, made not from silicon, but from graphene. This “tiny” it really is- not larger than a grain of salt! Even more important, it is also the world’s fastest transistor, handling frequencies upto 155GHz. To put it into perspective, silicon can operate at a speed of “only” 40GHz! That is, just one tiny clump of graphene transmits electrical information 2.3 times faster than silicon wafer! So, no wonder IBM researcher, Dr. Yu-ming Lin says, “In terms of the speed of the transistor, we currently see no intrinsic limits into how fast it can go”.

Every area of modern technology is catapulted by the miracle properties of Graphene.

· Electronics

· Medical science

· Oil exploration

· Warfare

Fun Electronics

Imagine you can roll up your iPhone and put it behind your ear….or watching movies on a television no thicker than wallpaper. Already Nokia and Samsung unveiled their own ultra-thin, flexible electronics (the Kinetic and Galaxy Skin) in 2011. This material conducts electronic information 230% faster than silicon, making it possible to download 3-D movies and charge your smartphone in just seconds. And forget about broadband- get yourself ready for extremeband, as huge chunks of data that once took you minutes (or hours) to download now arrive in just seconds. And you can forget about waiting hours (or even minutes!) for your Blackberry to fully charge. With much higher frequencies, you will never have to worry about losing a call every time you enter an elevator or parking garage. That’s why BBC comments, “…(it) could spell the end for silicon and change the future computers and other devices forever”.

An artificial implant for the Brain

The new types of prosthetic devices made with graphene promise to be much superior in treating neurological disorders like Alzheimer’s, Parkinson’s, blindness, epilepsy, paralysis and others. These materials also beckon new medical performances like:

Ø Killing Cancer cells, not healthy ones- New drug carrier made with Graphene oxide which greatly reduces side effects of cancer treatments by killing only the affected cells.

Ø Synthetic blood- a new blood substitute made of graphene as an ingredient has proven to be effective in restoring hemoglobin that carries oxygen, to maintain blood flow and prevent clots from forming. It proves to be effective against trauma of losing blood.

Ø Super Strong Tissue- By spinning densely-packed graphene nanoribbons into a tight yarn, researchers at UT Dallas created artificial muscle fibers that exert 100X the force of natural muscles and can rotate objects 2000X their own weight. Aside from staggering potential this technology holds for machines and artificial limbs, doctors also believe it could make possible nonorobots strong enough to propel throughout the bloodstream- delivering drugs, removing parasites and much more.

Ø New Body Tissue- Researchers at the Air Force Laboratory in Ohio are using graphene to grow new human tissue after watching how cells proliferate when attached to surfaces coated with graphene oxide (one of the major element of our body cells is carbon and graphene is an allotrope of carbon). One researcher says “A material that allows faster and more efficient growth of cells would indeed find many applications in the fields of biomedicine and biotechnology such as tissue engineering or to grow structures that could help heal wounds.” And another researcher at Graphene Labs says he is now “exploring the possibility of using graphene as a membrane in the next generation of artificial kidneys”.

At this point, one might ask, if there’s any stunning breakthrough graphene wouldn’t be responsible for bringing us!

New Era for Oil Exploration

Graphene could be a key component in uncovering large pockets of oil and gas hidden deep into the earth. One popular method of exploration uses small wireless sensors to wander deep into tiny cracks and crevices, from where they send data on any discoveries back to the surface. It’s a safe and cost-efficient technology. But, the problem is, sensors powered by conventional batteries can be made only so small. And that means the tiniest cracks and crevices are still off-limits for exploration.

Scientists in Rensselaer Polytechnic discovered that they could generate small amounts of electricity just by letting water and other fluids flow over materials coated with graphene. In fact, their tests demonstrated that one sheet of graphene just .03 mm by .015 mm can generate 85 nanowatts of power. Which means that by using graphene as a “smart skin”, tiny, self-powered microsensors could soon find oil and gas in previously undiscovered locations. The oil and natural gas shale boom currently underway could go several times over, because of previously undetected reserves now able to be found with graphene technology.

Battlefield of the Future

Graphene presages to be the material used for making the impossible. Scientists in UT Dallas have discovered that with sufficient electrical stimulation, a sheet of graphene heats up so much that the difference in temperature between it and the surrounding area causes light rays to bend, cloaking the object that is right behind the graphene. Imagine what this could mean for tomorrow’s battlefield…as invisible tanks and fighter jets quickly overwhelm their bewildered enemies. A company called Nanoflight has taken this discovery to the next level by creating a graphene aerogel for the Israeli army to “paint” on their missiles. In tests, they discovered this aerogel absorbs radio waves emitted from radar systems and scatters them as heat…making the missile invisible!

Industrial Demand

With such huge industrial applications of graphene, there is no doubt the future belongs to it. In fact, price of carbon-rich sources of graphite have gone up 300% during last five years, with price being in $2500-$3000 per ton now. That’s why, BCC research believes that commercial sales of graphite are set to explode from $67 million in 2015 to $675 million by 2020. And according to Futures Inc., demand for grahpene-based ink, photodiodes, high-frequency transistors and conductive coatings has already increased by 4,000% since 2010.

So, how can you position yourself to profit from this meteoric trend about to explode?

Actually, the answer is in graphite- because graphene is made from graphite. As mentioned above, the price of graphite is exploding during last few years, with the trend to continue in coming years.

So far, graphite has been mined in only five countries, with China currently controlling 70-80% of world’s graphite production. That puts graphite in a rare earth materials-type position, in that China has a near stranglehold on the market, as graphite’s dominant future creeps upwards.

That’s what set off the rare earth boom in 2009 and 2010, sending any company with access to rare earths outside of China soaring thousands of percent. And its exactly what is happening with graphite right now. China’s production facilities and mines are old and may be nearing depletion. And they are trying to get top dollars for what they have left. And small supply that comes outside of China is typically used in full by the country where it is mined for traditional steel and automotive applications. The situation has become so alarming that, Britain, EU and U.S. have declared graphite a critical supply material.

As seen from the graph below, all of these have an impact on the carbon-rich sources of graphite:

So, this trend gives other companies outside of China bomb-shell opportunities to profit from soaring demand of graphite. In fact, some Canadian mining companies which are in development stage, are set to gear up huge growth potential with their mining resources. Their stock prices are to go up multiple times.

Futures Ahead

As quoted by analyst Larrain Vial, “the attributes of graphene- transparency, density, electric and thermal conductivity, elasticity, flexibility, hardness, resistance and capacity to generate chemical reactions with other substances- harbour the potential to unleash a new technological revolutions of more significant proportions than that ushered in by electricity in the 19^th century and the rise of the internet in the 1990s.”

What graphene-based technology has shown so far is just tip of the iceberg. We have only scratched the surface of how graphene will impact the electronics, medical science and energy industries. New elements of technological inventions will SURELY impact the world in times ahead.

Towards A New World Currency

2012-01-23T20:30:00.000-08:00

We have seen an interesting digression in world monetary trend. China and Japan have announced last month (26^th December) that they are going to start trading with each other in their own currencies, OTHER THAN U.S. DOLLAR. So they have formed a powerful currency union.

Japan previously used its massive foreign currency reserve of U.S. dollar to artificially devalue its currency- by pegging its currency to USD and expanding its money supply- thus undervaluing its currency and boosting its exports. China presently is doing the same. They currently hold world’s largest foreign currency reserves- China has about $3.2 trillion, while Japan holds $ 1.3 trillion- and any move to reconstitute the makeup of those holdings could change the global currency map.

Over the short run, the agreement is likely to lead to continued weakening of the dollar against the yuan (on the contrary, strengthening the yuan). That should help the U.S. to lessen the trade deficit with China, increasing American exports while weakening imports from China. On the other hand, the strategic advantage that the U.S. used to enjoy through the world dominance of its own currency, like getting all the products and commodities (mostly OIL) by importing in its own currency, would surely diminish. The seemingly unending American prosperity manufactured by way of manipulating its currency and money supply has started showing its diminishing returns.

The present fate of the dollar can be compared with the waning of the British Pound a century ago as the most prominent currency for international trade. And in all likelihood, the Chinese yuan will increasingly play an important role in Asia. So that U.S. dollar would be less important as currency for transactions in Pacific Rim trade.

It would be interesting to observe the reaction of the U.S. It has so far opposed every effort to deveiate away from dollar as world reserve and trading currency. Now that world's top 2 economic superpowers are going their own way, what the U.S. is going to do about it? It is already beleaguered with its own debt and other economic problems, and it counts so much on the economic strengths of these two giants! The global economy is taking on its inevitable course, with new players dominating the arena.

Fall Of The Dollar: Part-II

2011-11-01T14:36:00.000-07:00

A Look Back

U.S. dominance occurred from the early 20^th century, when the country cemented its position as the dominant world political and economic power. The U.S. pursued an aggressive policy of expansionism, exerting its political and economic influence around the globe. After establishing herself as the world super-power, it employed all-out campaign to control everything-ranging from political, cultural, economic and monetary aspects. The whole world has been Americanized systematically.

Classic Gold Standard

Throughout the years gold has been accepted as money and the preferred currency or medium of exchange. The classic gold standard began to take shape in 1871 in Europe and elsewhere. From 1871 to the beginning of WWI, the currency of all the major trading countries of the world was pegged to gold. Gold coins circulated as medium of exchange daily. Gold was deposited in commercial banks and lent out. These commercial banks created credit by lending out more than the original amount of gold deposited. But they were always forced to keep sufficient reserves of gold on hand in order to meet demand of their depositors’ withdrawals.

The gold standard prevented imbalances in trade accounts between countries. Gold acted as an independent automatic adjustment mechanism. This prevented a country to drift away too far from the balance of trade (export/import).

The gold standard also stopped governments from acquiring large budget deficits. With a limited amount of credit available, government borrowing would drive up interest rates, making it more difficult for the private sector to borrow and invest. And if the private sector cannot borrow and invest profitably, the economy suffers. Government budget deficits spilled over into trade deficits leading to more gold flowing out; leading to eventual return to balanced trade.

The undesirable side effects of deficit spending made governments to strive to maintain balanced budgets.

Bretton Woods System

In July of 1944, delegates of 44 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire in USA. In that historic meeting, among other economic landmarks, came the Bretton Woods Agreement, which ESTABLISHED U.S. DOLLAR AS THE WORLD’S RESERVE CURRENCY. The Agreement pegged the dollar to gold at $35 per ounce and all other major currencies were pegged to the Dollar at fixed rates. The critical point here that, the value of dollar was BACKED BY GOLD RESERVES OF U.S. GOVERNMENT, and foreign governments were able to exchange $35 U.S. Dollar for an ounce of gold on demand.

Dollar As Reserve Currency Of The World

Thus US Dollar became the reserve currency of the world. This meant that the dollar became the currency used by other governments and institutions as part of their foreign exchange reserves and it also became the international pricing currency for products traded on the global markets, like OIL.

By virtue of using its own currency, the U.S. has run tremendous trade deficits without repercussions simply because the dollar is the reserve currency of the world. The truth is, between 1945 and the early 1960s, the world enjoyed relative monetary stability thanks to the Bretton Woods Agreement. However, the arrangements put in place in 1945 became strained in the second half of the ‘60s.

U.S. Dominance And Aftermath

During the 1960’s the U.S. became the undisputable world power by virtue of several factors,

Military supremacy over all its rivals.
Strength of the U.S. economy and the production method of America being far superior to any other nation. As told by Calvin Coolidge, 30^th President of the United States, “The Business of America is Business”.
With the dollar now the global reserve currency, America had control over global financial markets.

At these times, the US governments implemented the GUNS AND BUTTER POLICIES. At one end, it operated its imperialistic ploy of controlling the strategic places of the earth, especially which have much holding of oil reserves. So it raged the war in Vietnam. At the same time in internal arena, it funded such mega schemes like Great Society Programs, fighting the War of Poverty and notably, Putting Man on the Moon. All these resulted in gigantic budget deficits, that were monetized (financed by in increase in money supply) by the Federal Reserve. All these put enormous pressure on dollar.

Other countries, beginning to realize that they were holding increasing amounts of US Dollars, began redeeming the dollar reserves for gold. At first there was not a lot of concern, because the amounts were relatively small. But, in the second half of sixties Washington became very worried.

By 1971, the trickle of gold leaving U.S. Treasury turned into flood. As a consequence, in August 1971, President Nixon decided not to exchange dollars for gold at the agreed upon rate.

Nixon Shock

Historically the governments have been incapable of maintaining the value of their currencies. Political leaders always face the dilemma of need for enormous funding to finance large schemes, at the same time pressure for keeping the taxation lower. Desperate to appease all the constituencies, they inevitably resort to “borrow to finance some new spending without raising taxes”.

Back to the context, President Nixon in 1971 decree repealed the Gold Standard i.e. keeping physical possession of gold against the physical currency (dollar); thus making the “real money” into “fiat currency”. This paved the way of unbridled expansion of dollar without any real asset behind it. This may be construed as the root of Fall of the Dollar.

Thus America truly entered the age of paper money: MONEY BACKED BY NOTHING! The Dollar was officially a “fiat” currency. By fiat currency, it means a common type of currency whose VALUE is based on issuing authority’s “guarantee”, not on any intrinsic worth or extrinsic backing.

The Dollar Tsunami

After President Nixon “closed the gold window”, the U.S. leadership worked feverishly to develop a new system of international monetary management. Due to super-heavy spending by U.S. government, such as in Vietnam War and Great Society Programs, the dollar was greatly overvalued. The American economy was also under serious inflationary pressure. The Nixon action effectively paved the way of monetary expansion,i.e. devaluation of dollar. The U.S. government then entered negotiations with its industrialzed allies to appreciate their own currencies, in response to this change. In December 1971, a meeting at the Smithsonian Institute by a group of 10 countries (G10), all industrialized, created the Smithsonian Agreement.

This Agreement effectively ended the fixed exchange rate system established under the Bretton Woods Agreement. This Agreement:

Reestablished an international system of fixed exchange rates, without the backing of gold or silver.
Allowed for the devaluation of the U.S. dollar; in other words appreciation of other currencies.
Was the first time in which currency exchange rates were negotiated.

The Smithsonian Agreement, which President Nixon hailed as “the greatest monetary agreement in the history of the world”, led to an approximately 8% devaluation of the U.S. dollar and revised the price of gold from $35 to $38 per ounce. However, the Agreement failed to impose discipline on the U.S. government and with no other mechanism in place, the pressure against the dollar on gold continued. The result was, gold became a FLOATING ASSET. Towards the end of 1971, it reached $70.30/ounce of gold and has kept on rising.

This is when the industrialized nations of the world started to abandon the devalued peg against the dollar (BUT: it is still being done in case of Chinese currency, Renminbi, i.e. pegged with U.S. Dollar). By end of February 1973, all resemblance to the Bretton Woods currency exchange or the Smithsonian fixed rate of exchange system was closed. It was when the major currencies began to float against each other, as governments still had difficulties maintaining the exchange rates within +/-2% band, as stated in the agreement. It essentially brought into effect the FLOATING exchange rate system, which determined the exchange rates based on the market forces of supply and demand.

The Flood Gates Are Opened

When the U.S. abandoned the gold standard, it hampered an orderly economic policies that the entire world was bound to. This is very significant. All of the barriers to keep the U.S. in check just disappeared. The country was no longer required to pay for its imports with gold, or even dollars backed by gold. The U.S. could pay for its imports with dollars with no backing at all or with dollar-denominated debt instruments. America had the unlimited freedom to expand its monetary bases at own desire.

This created a surge in the central banks around the world holding U.S. dollars as reserve assets, due to the ever growing trade imbalances between the America and rest of the world.

Fall Of The Dollar: Part-I

Legacy of Jobs

2011-10-20T22:33:00.000-07:00

Steve Jobs has become immortal upon his death. His wonderful creations, his passion and his uncanny drive- all have made him a superstar reigning in stratospheric heights.

Jobs showed an “unconventional” path to life. The urge to run by the heart, instead of the brain. Chase after what the heart desires, instead of conventional establishment. This is THE difference, the “Road Not Taken” approach of Jobs. In Job’s own words, “….Don’t be trapped by dogma-which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else in secondary.”

It takes radical determination, it takes hell of a courage to come out of comfort zone, come out of convention. It takes brimming tenacity of mind to pursue the inner-most urge and stick to it. You should be dead serious to stick to that hardcore urge. It’s like follow “What the Heart Says”, instead of what convention, or establishment tells you to. He was so radical, he made his own rules. He judged the world in binary terms. Products are “insanely great” or “shit”, one is facing death from cancer or “cured”, subordinates are geniuses or “bozos”, indispensable or no longer relevant. His outrageous comment about Microsoft, in the tele-documentary “Triumph of the Nerds”, was, “The only problem with Microsoft is they just have no taste……I have a problem with the fact that they just make really third-rate products”. This statement is quintessential Jobs: arrogant, frank, insightful and perhaps more than half right, though brutally overstated. One of NeXT executive commented, “Being around Steve is a reality distortion.” It is this Radical Mind that created the difference- in his own life and in his works.

His trademark is intensity, intuition-driven and radicalism. He had vision, he had the insight to exercise “think different” approach, which contributed to put Apple’s designs a head above the competition. He was intensely focused on his vision. In pursuing his heart’s urge, he was relentless. “….I’m convinced that the only thing that kept me going was that I loved what I did. You’ve got to find what you love….Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.”

He had unconventional ideas. The thinking of death and get yourself done before you are gone-both are unconventional by western standards. The norm is to think of everything else other than death and get going as usual. The unusualness is evident in his behavior. He would park his Mercedes in handicapped spaces, didn’t put license plate on his car, offered stock options to his employees by backdating the option’s value.

He was visionary by the super-most standards. That’s how he became pioneer in his every endeavor. He is without a doubt top pioneer of computer generation. His uncanny creativity is obvious. He was the clear visionary to see technology to be designed and sold as consumer product, which was the revolutionary idea in early years of computers. His leadership in innovative products like Macintosh personal computer (the dominating Windows Operating System being modeled from Mac’s point-and-click system), computer animation (with Toy Story being the first fully computer-generated feature film by his company, Pixar) and series of wildly successful products of “simple elegance” like iMac, iPod, iPhone, iPad and other gadgets. Very few human souls invoked such immense repercussion in contemporary world like Jobs did. This “alternative” philosophy, this alternative approach to life, this intensity of heart’s passion, this mountain-like determination to materialize one’s own vision- are the true legacies of Jobs.

China Economy: Miracle or Bubble?

2011-10-13T20:59:00.000-07:00

The problem with economic consequences is that, they are not visible before long long time. As we have seen the effects now unraveling in different parts of the globe, like the debt and demographic crisis in Japan, or the sovereign debt crisis in Europe or the Budget & Trade Deficit in the U.S., they occurred and impacted the economies within long span of time. There are also some symptoms that have evolved in China, which are just tantamount with Economic Bubbles. Edwin Chancellor, a foremost authority on Economic Bubbles that occurred throughout history, has identified some classic symptoms of economic bubbles in case of China. Surely these have far-reaching consequences.

China has roared the most in the contemporary global economic arena. But its reputation as an unstoppable giant- as a country with an unending supply of cheap labor and limitless capacity for growth-masks some serious and worsening economic problems. China’s labor force is aging. Thanks to its brutally-enforced “one-child” policy, China’s population is actually set to decline in 2015, and its worker participation rate will peak this year- after which the numbers of people joining the work-force will fall off rapidly. If you would look at the real future of China, look at Japan, whose own aging population is the hidden cause of its continuing decline. Apart from that, its consumers save too much and spend too little. Its political and economic policy tools remain crude.

CLASSIC SYMPTOMS OF ECONOMIC BUBBLES IN CHINA

· The biggest is the staggering dependence of its economy on government-fueled investments boom: No major economy has had investment as a percent of GDP at 50% for a sustained period. No country can be productive enough to take that proportion of GDP and re-invest it into new capital stock without eventually facing massive over-capacity and a staggering non-performing loan problem. In a free-market economy, investments fall during periods of uncertainty. Yet in 2009,Chinese investments in fixed assets jumped by 30%, rising to a record 58% of GDP. Roughly a quarter of this investment was state-directed, with many projects serving solely to meet local GDP growth targets. One commentator says, China is following the “Asian growth model on steroids”- i.e., the pattern of the Asian Tiger economies, boosting growth through ever-increasing investment, which led to the Asian Crisis in 1997-98.

Most likely, as per the wizard forecaster economist Nouriel Roubini (who first correctly predicted the American Housing Crisis), after 2013, China will suffer a hard landing. China needs to save less, reduce fixed investment, cut net exports as a share of GDP and boost consumption as a share of GDP. China is rife with over-investment in physical capital, infrastructure and property.

Roubini further added that the economy is overheating here and now, but in the medium term, China’s overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible-most likely after 2013- China is poised for a sharp slowdown. Continuing down the investment-led growth path will worsen the visible glut of capacity in manufacturing, real estate and infrastructure.

Roubini says, “I was recently in Shanghai and I took their high-speed train to Hangzhou”, referring to the Maglev line that has cut travelling-time between the two cities to less than an hour from four hours previously.

“The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train-station, is also the new local airport of Shanghai and you can fly to Hangzhou” , he said. “There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.”

· Lack of domestic demand: Too few people in China had the discretionary spending capability to support its economy domestically. Analysis has shown that it took a per-capital gross domestic product of about $5,000 to have meaningful discretionary spending power in China. About 110 million Chinese had that much or more, but they constituted only 8 percent of the population and accounted for just 35 percent of GDP in 2009, while exports accounted for 27 percent. In contrast, in advanced economies, about 70% of economic output is attributed to domestic consumption! Even China’s middle and upper classes had only 6 percent of Americans’ purchasing power.

· Easy Money and Risky Lending: China today is keeping interest rates artificially low to promote investment and subsidize state-owned companies. For the past 40 years, the interest rate that major U.S. companies have borrowed at has been, on average, 1 percentage-point higher than the rate of GDP growth. In contrast, the Chinese prime borrowing rate has been on average 9 percentage-point below GDP growth over the past two decades!

What’s more, Beijing responded to the 2008 financial crisis and the resulting collapse in its exports by ordering its banks to lend. In 2009, new bank lending grew by nearly 10 trillion renminbi ($1.5 trillion), or around 29% of the country’s GDP.

“The size of this credit expansion is worrying in itself”, obereves Edwin Chancellor. “It beggars belief that lending could have expanded so rapidly without some decline in underwriting standards”. Indeed, much recent bank lending in China resembles the lowered underwriting standards that led to America’s subprime-mortgage meltdown of 2007-08. For instance, up to half of 2009’s bank loans went to local government funding vehicles that appear to have little or no current cash flows. Instead, local governments are now depending on asset prices for revenue-much as they did in places like California during America’s housing bubble.

· Real Estate Bubble: Chinese authorities are pursuing massive commercial and residential real estate construction despite lack of perceptible demand. Among the results: the newly constructed “ghost town” of Ordos in Inner Mongolia-with housing for a million, and virtually no residents. “Build it and they will come”- or maybe they won’t.

In addition, for Chinese households, artificially low rates of interest on their savings are also driving them into speculation in real estate-just as Americans did the years leading up to the 2008 crash. As a result, in China today, residential real estate is averaging between 20 and 40 times average household income-compared to roughly 10 to 12 times household income at the height of the U.S. housing bubble in the most overvalued neighborhoods. “This has to qualify as the most dramatically overvalued real-estate bubble in world history”, writes Steven Jon Kaplan of Truecontrarian.com.

· A Surge in Corruption: “All great speculative manias have been accompanied by rising levels of fraud”, observes Edwin Chancellor- and it’s only after the bubble bursts that the Madoffs and Enrons come to light.

Here, of course, is where the closed nature of Chinese society is especially worrisome: China recently earned a dismal 3.5 (out of 10, for “very clean”) in Transparency International’s 2010 Corruption Perception Index, giving it a rank of 78…just below Tobago.

More worrisome: the real estate boom and infrastructure spending that are driving Chinese growth are especially susceptible to corruption. As evidence, the New York Times reports, half of all those luxury sales are estimated to be bribes.

· A Fixed Currency: “Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts”, cautions Chancellor.

China’s currency, the renminbi, is pegged (fixed) to the U.S. dollar-leading to an undervalued exchange rate that boosts exports, keeps interest rates low, and encourages massive inflows of foreign capital.

And get this: The Bank of China is printing as much as $ 2 billion worth of renminbi per day in order to buy dollars and maintain the currency peg. The money supply skyrocketed 26% last year in China, creating an artificially booming economy that cannot last and will eventually cause a collapse.

CONSEQUENCE?

China avoided a hard landing during the global credit crunch but faces a downturn after 2013, as it will struggle to keep increasing fixed investments, Roubini said. He said, investment was already 50 percent of gross domestic product. Sixty years of data had shown that over-investment led to hard landings, citing the Soviet Uniion in the 1960s and 1970s, and East Asia before the 1997 financial crisis.

“A significant slow-down in China, or even negative growth, would likely reverberate throughout the world economy, including that of the United States”, warns Banning Garrett, Director of the Asia Program for the Atlantic Council of the United States. “The end of China’s role as an engine of growth would be a blow to global economic growth, affecting investors in China, purchasers of Chinese goods, and exporters to China”.

Bloomberg’s David Lynch agrees (1/26/11): “Any Chinese financial emergency would reverberate around the world. The total value of the country’s exports and imports last year was $ 3 trillion, with about 13% of the trade between China and the U.S. As of November (2010), China also held $ 896 billion in U.S. Treasuries.

If China’s growth falls to less thn 5% in 2011 (from the targeted 8%), global commodity prices could plunge by as much as 20%, warns Fitch Ratings (11/30/10). Shares of U.S. and other Western commodities, steel, energy, manufacturing, automotive and chemical firms- which have come to rely on China as their biggest customer-would tumble if the country’s construction and capital-expenditure booms abruptly ended.

“A bursting China bubble would be a massive deflationary shock to the world economy”, says Chen Zhao, Chief Global Strategist and Managing Editor for Global Investment Strategy, BCA Research Group. “With China in growth recession, global saving excesses could surge and world aggregate-demand would be vastly deficient. Bond Yields could move to new lows and stocks would drop, probably precipitously-in short, investors would face very bleak and frightening prospects.”

Like we have said at the beginning, it takes long for economic consequences to become visible. But, as symptoms often presage ominous outcome, this might be the case for the bubbles foaming in Chinese Economy over the years. And, if they burst, it will have far-reaching consequences.

Who Gains What- Out of Synthetic Debt Deal?

2011-08-28T13:10:00.000-07:00

As suggested by us, the U.S. was able to cut- through a last minute Debt Deal on August 2 to avert possible default, after almost 2 months of haggling over the issue, and pressing over priorities of each other parties. Most of the proposed rise of debt ceiling ($900 billion in this year and subsequently $1.2 to 1.5 trillion) would be ploughed-back by deficit reduction of $2.4 trillion over the next 10 years.

The bill tilted heavily on the Republican agenda- not raising any new revenues by NOT incurring new taxes on American corporate, WITHOUT reducing any significant Defense budget. It only focuses on deficit reduction by cutting expenses. The common objective of achieving a balanced fiscal condition could not be met without instituting an increased revenue earning (by higher taxation mostly from rich corporates and individuals), vis a vis curtailing onerous budget spending. The cumulative deficit reduction of $2.4 trillion, proposed to be made within next 10 years, is less than the figure $4 trillion that bipartisan groups and political leaders had more or less agreed was necessary to put the debt on a meaningful downward path relative to GDP. It’s also the number that Standard’s and Poor, the credit rating agency, had suggested necessary for America to avoid a downgrade to its AAA credit rating. Between American battle of conflicting priorities- maintaining fiscal balance as well as maintaining political and military supremacy - the latter clearly prevailed. The current reduction of defense budget proposal, in inflation adjusted dollars, kept Defense spending higher than it was at the height of the Cold War. Adjusted for inflation, the U.S. spent at most $580 billion a year on defense at the height of the Cold War. In the 2011 fiscal year, the Pentagon’s baseline budget is $549 billion, with another $159 billion allotted for the wars in Iraq and Afghanistan, for a total of $708 billion. That total figure drops slightly to $670 billion in the 2012 budget proposal.

The cloudy process of deficit reduction has lots of catches within it. The budget employs a BASELINE that automatically adds an upward adjustment for the rate of Inflation. And then, on top of this, the budget is automatically adjusted upward by another 7.5% each year! So, every year, the budget increases by 7.5% plus an adjustment for inflation!

So, the bottom-line is, the U.S. budget would be increasing by $10 trillion over the next 10 years. Now, if the planned deficit reduction materializes, the budget will only increase by $7.5 trillion! So, it’s no surprise that S & P on August 5 had downgraded America’s sovereign rating for the first time since the U.S. won the top ranking in 1917. This entails even higher costs on top of debt-behemoth that is on the economy’s shoulder, translating in higher interest rates. Projections are that the higher interest rates triggered by a downgrade could knock 0.4 percentage points off U.S. growth. That’s a big deal when the economy is growing at just 1.3 per cent (as per second quarter GDP data, annualized). And it’s worth noting that now that GDP is revised to be growing insignificant, debt is larger as a share of GDP (with gross debt ratio to be 96% of GDP, as of June 2011). This massive debt repayment program would have to be met by further monetary expansion.

Where will this extra money come from? Clearly, the Fed will continue its “money-pumping” program, by buying out massive amounts of Treasury Securities which are beyond purchase demand by investors. It will continue to erode perilously the value of money i.e. U.S. Dollar further and further.

So, if Republicans are the clear winner from this deal, the economy is the loser. An ideal deficit-reduction package would have coupled near-term stimulus with long-term consolidation, that at first stabilized and then reduced the debt as a share of GDP. As it transpires, this deal certainly doesn’t do the first and it’s unclear that it will do the second. So, in the final count- as political eventualities have shown- the fiscal chaos in the U.S. goes on. It’s like a spiral the continues unbroken. And, as mentioned, it does have monetary implications, which erode further the U.S. Dollar value.

After QE2, What’s Next?

2011-07-27T15:40:00.000-07:00

In our last post about U.S. Quantitative Easing (QE) http://investmentsandbeyond.blogspot.com/2011/06/deadline-june-30th-end-of-quantitative.html, we discussed about the background and actual results of the QE program. We also mentioned about the possible outcomes that might emerge. As anticipated, the Federal Reserve is contemplating on injecting another bout of “money-pumping” program, as evident from Fed Chairman’s testimony to the Congress Financial Services Committee on July 13, “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support”. Ironically, the same period coincides with crossing the full-limit of U.S. debt ceiling, which needs to be enhanced and pending repayments must be made by August 2.

We can surmise from careful reading of Ben Bernanke’s statement to the Congress that the Fed would somehow and someway (however they name it) come to the rescue of the flat economy with another trillion or so free dollar. The stalled debt talk would reach a synthetic conclusion at the 11^th hour, the U.S. debt would narrowly escape the default. Actually the US government and correspondingly the Fed have no alternative. As Bernanke himself testified before the Congress, “Any U.S. default would be a major crisis and would throw shockwaves through the entire global financial system”. The US economy is being cut by a double-edged sword, on one side, further indebtedness crushing the U.S. dollar further; on the other, the U.S. mandatorily has to borrow more (as the US default would permanently jeopardize the government’s credibility) to repay and to further expand the economy. This is imperative, as in the U.S., where consumer spending accounts for 70 percent of the GDP, without increased consumer spending, the economy would again be recession-bound. And the less people are out of work, the less they consume.

So, we can fully expect another DILUTION of money. Through the haggling over “money”, by means of endless credit expansion, the government has put the “trust” in money (which acts as a legal tender provided by the state) in serious jeopardy. Already the ratings agency Moody’s announced it is considering downgrading of U.S. debts. This would further increase the interest rates and the borrowing costs. The increased payment costs would just make the likelihood of pulling out of downward debt-spiral almost impossible.

Another aftershock of this attempt to crush the Dollar would be the fall of housing prices further. According to Gary Shilling, President of A. Gary Shilling and developer of S & P Case/Shiller Housing Index, we can expect “another big leg-down in housing”, which might trigger serious problems for the economy in 2012. The Bottom Line is: Gary Shilling thinks house prices probably have another 20% to fall.

The same story holds for European countries, where sovereign indebtedness for lot of countries has gone beyond their actual capacity (i.e. national economic output). For example, Italian Debt-GDP ratio is now 120%, for UK it is 77%. For Japan, it is the highest indebtedness rate of 225%! So, clearly we are heading for a global economic anarchy.

Thus we are witnessing the Dollar fall and inherent reciprocal rises of gold and oil. Bernanke, himself testified, “the rising prices of gold reflects global uncertainties…the reason that people hold gold is as a protection against what we call tail risks: really, really bad outcomes’. As the governments all over the world have become the source of systematic risks by abusing the powers they have been entrusted with: power to spend, borrow, tax and print money. We don’t see any possibility of respite from this vicious cycle in foreseeable future. Amid these uncertainties, gold is poised to shoot further in price, with the value of $2000 knocking at the door.

Sovereign Debt Crisis: Where does it end?

2011-07-12T23:04:00.000-07:00

The problem with debts is that once you open this Pandora’s Box, it becomes a vicious cycle. You take on more debts and so on. This spiral goes on, as if a powerful genie is pushing you through. If capitalism brings forth more freedom, sometimes this freedom becomes abusive. You create unlimited amount of debt capital for whatever purposes to satiate unending needs. The sovereign nations are victims of this vicious cycle and seem to be heading towards doom. They have gone extreme beyond their means.

European sovereign debt crisis nicknamed "the PIIGS" (after countries most affected like Portugal, Ireland, Italy, Greece and Spain) is worst hit. At end of 2010, Portugal's public debt was 93% of its GDP; Ireland's 96%; Italy 119%; Greece 143%; Spain 60% (source:Wikipedia). Then comes the story of Japan, which crossed the national debt to GDP ratio of whooping 226%! The US indebtness is estimated at 93% of GDP. Economists Carmen Reinhart and Kenneth Rogoff have shown that a rise in government debt above 90% is associated with a decline in economic growth of roughly one percent point per year.

Prof. Reinhart warns, “These processes are not linear, you can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.” That is the nature of debt bubbles; they keep expanding and expanding until the day that they inevitably burst. Governments around the world will issue somewhere in the neighborhood of $5 trillion more debt this year alone. Debt to GDP ratios all over the globe continue to rise at a frightening pace. Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet. If even one domino is toppled, there is no telling where things may end.

We have seen the marathon round of bailouts being taken place in Europe. We have to keep in mind that all of these “bailouts” are just more loans. There is no way that the Greeks are ever going to be able to repay all of this money. But this is what happens when a nation lets debt get out of control. For years and years it can seem like all of that debt does not have any consequences, but then the day of reckoning comes and it is a complete and total nightmare.

So will these bailouts solve the problem?

No, giving Greece more loans is only going to kick the can down the road for a little while longer. The truth is that Greece is bankrupt. Unless huge amounts of Greek debt are forgiven, Greece is going to default sooner or later. When confidence in the finances of a nation is lost, borrowing costs can go up very quickly. Today, the yield on two year Greek bonds is up to 28.6%. When Lehman Brothers collapsed, it was leveraged 31 to 1. Today, German banks are leveraged 32 to 1. German banks are also holding a massive amount of Greek debt. That is why there is so much fear that the crisis in Greece could spread across the rest of Europe and start toppling dominoes. The severity of the crisis is evident.

The U.S. is rapidly approaching a day of reckoning like the one that Greece is going through. The U.S. government has piled up the biggest mountain of debt in the history of the world and faith in the U.S. dollar is dying. The whole world is watching the U.S. government run up record-setting budget deficits and they are watching the Federal Reserve print money like there is no tomorrow and they realize that the U.S. financial system is slowly imploding. Now President Obama is crying for a sustainable solution of budget deficit by reaching a deal as part of a trade-off in which Congress would agree to extend the nation’s debt limit (which has already crossed $14.3 trillion limit) by Aug. 2 to prevent a catastrophic government default on its bills. Right now, the Federal Reserve has been buying up most new U.S. government debt with dollars that it has created out of thin air. This is a giant Ponzi scheme, and it is a major contributing factor to the decline of faith in the U.S. dollar.

The world financial system is far more vulnerable today than it was back in 2008. Professor Sung Won Sohn at California State University warns that “The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States.” The next wave of the financial collapse is going to hit at some point, and when it does it is going to probably be even more painful than the last wave. The major risk involves is, this debt crisis destabilizes the very fabric of the society. It was evident from the wild protests that have been taking place in Greece. Today more and more Americans are losing their jobs and their houses, being forced to become outcasts. It portends sad unrest that may erupt elsewhere in the world also. So, are we heading to a complete financial collapse and pervasive civil unrest around the globe?

Deadline June 30th: End of Quantitative Easing?

2011-06-27T21:13:00.000-07:00

To combat virulent recession, the Fed started Quantitative Easing in November-2008, by buying-out “toxic assets” and circulating money into the economy. The QE is an ad-hoc monetary policy used to stimulate the national economy when conventional monetary policy has become ineffective. Central banks utilize QE by purchasing financial assets from banks and other private sector businesses with new money that it creates electronically. This action increases excess reserves of the banks and also raises the prices of financial assets bought, which lowers their yield (price up, yield down). The whole process aims at reigning in lower interest rate regime, making it cheaper for businesses to raise capital. It is also an inflationary tool and can be used to ensure that inflation does not fall below target, thereby boosting economic activities.

At some point, cash emerge from bank reserves and flow faster into a larger economy. Private sector money would change hands more rapidly. The expectation is that hiring would rise; banks would lend; loans would be cheap and lots of people would buy houses.

After QE1 (starting from Nov-2008) added $1.75 trillion to federal debt with little positive impact, the Fed might have chosen to abandon quantitative easing. But in November-2010, the Fed again began injecting another $600 billion into the economy- this time QE2.

Almost closing the deadline June 30^th, the QE2 involves buying up long-term treasuries in order to depress long-term interest rates. The tactic could stimulate lending as mentioned above, but will boost inflation, which, due to the Fed’s money injections, is already poised to continue climbing. At the least, it is evident the desired results are far from visible. Ironically, it was also endorsed by the Fed Chief in a way, when Mr. Bernake admitted publicly last week that: “ Maybe some of the headwinds that are concerning us, like the weakness in the financial sector, problems in the housing sector-some may be stronger and more persistent than we thought.”

When the deadline comes to a close on Thursday June the 30^th, what might happen to the already depressing economic scenario? To bolster hope over economic recovery, may be plethora of QEs (QE3, QE4….) will continue to inject billions/trillions into the thin air. Meanwhile, the economy will continue to be in the doldrums. This shakiness was evident, as the U.S. stock market started to nosedive, at one point sending the DOW more than 200 points. Stocks continued to slide-the market finishing down for the seventh week out of the last eight. There is a potential of an ensuing market collapse. Correspondingly, we might expect a strong push in gold and silver prices, taking them to new heights.

Return to the Gold Standard?: Part-I

2011-06-21T20:53:00.000-07:00

The unprecedented changes in global economy in last couple of years and its aftershock have evoked debates over several unique economic issues, one of them being the possibility of returning to the Gold Standard. This particular economic phenomenon is nothing new, as far as economic history is concerned. The classic gold standard was in place from last part of 19^th century till First World War. This allowed a country to maintain a balance between its monetary reserves and its gold holdings. It also allowed an economy to limit the amount of credit it could create. In essence, it forced a country to maintain a balanced budget and prevented it to “go beyond its means”.

Under the Gold Standard, a government is limited-both legally and practically-as to how much paper money it can print. As recently as the Lyndon Johnson administration (1963-1968), the U.S. could print paper dollars equal only to four times the value of the nation’s gold reserves. Under this standard, governments that print too much paper money risk runs on their gold reserves. Runs occur as holders of the paper seek to convert to gold before the vaults are empty. A run on the dollar is what happened in the late 1960s, which culminated in President Richard Nixon “closing the gold window” in 1971.

The subsequent offshoot was the governments creating budget deficits to the unsustainable level. As at present (in May 2011), the US debts amount to $14.32 trillion, representing 98% of 2010 GDP of $14.66 trillion (source: Wikipedia). This undue expansion has had its consequences, with the dollar losing its value (in purchasing power) of over 80% in last 40 years, after the abandonment of gold standard. In this crucial junction of global economy, it is worthwhile to think of some drastic changes, at least there are some learning points from this particular issue of Gold Standard.

Fall of the Dollar:part-1

2011-06-15T21:17:00.000-07:00

The primacy of US Dollar as global Means of Exchange as well as World Reserve Currency is in tatters, due to various geo-political and economic reasons. From the early 20th century, United States has enjoyed unprecedented economic and political clouts of global scale. This enabled Uncle Sam to exercise supreme control everywhere in the world. This also enabled the country to alter the traditionally established means of exchange and reserve currency, i.e-Gold Standard. For meeting its ever expanding fiscal deficit, it was forced to break the system of balancing its money with reserve (i.e. gold). So it was virtually free to expand its monetary base, without having to keep any corresponding reserve. By selling its own-currency-denominated debts like US Treasury Bills and Bonds, it has borrowed virtually indefinitely. Foreign countries, mostly the central banks, have hold mega amounts of US dollar reserves on their accounts, which in turn, don’t carry much value other than promise to pay. Dollar has also been established as means of exchange to trade oil, which is the “global fuel” for energy, for no real economic reasons. The costly wars that the US has been engaged with, starting from Vietnam War to recent Iraq & Afghanistan War, have caused gigantic pressure on its fiscal balance for long. The most powerful country on Earth, apart from its fiscal imbalance, is also entangled with its own economic crisis like real estate collapse and financial sector collapse. The seemingly indispensable Quantitative Easing policies will continue to shatter the US currency further. Time will say where it is heading to.

Investments- All About Growing Wealth

2011-06-14T20:44:00.000-07:00

Investments is vital for life, just like education or healthcare. It deserves our attention and energy (and offcourse some of our money). Its about timing. When we spot an opportune time and take a small action, it gets a multiplied yield for us. Its about being aware of the present Market, following the events impacting it and making ripples (and waves). Taking those situations into consideration, identifying some directions and opportunities-are all the market-conscious investors do. There are some principles, which are almost as powerful as laws- act as dynamics and gives positive leverage to our invested money. All these things and concerns we will explore and cultivate on regular basis. These will lead us to growing our wealth.